West Capricorn, image (c) Seadrill
Seadrill expressed a significant amount of forward-looking optimism in their latest earnings report today. The offshore driller expects to continue year-over-year growth of 20 percent or more for the rest of 2014.
The fundamentals to support continued long-term profitability for high spec offshore drilling firms like Seadrill are there, the company notes. Although dayrates for ultra-deepwater floaters dipped in the third quarter, “the world needs significantly more rig capacity to recover a barrel of oil than they did only ten years ago. Over the medium to long term, this trend will work in favor of drilling companies.”
Seadrill notes that,”since 2005, 314 additional rigs have entered the market, representing an investment of approximately US$114 billion, and increasing the fleet by approximately 53%. The production of oil offshore has in the same period decreased from approximately 24 million barrels per day to 22.5 million barrels per day. Since 2003 the number of contracted rigs in Norway has increased by 174%. Over the same time period production has declined by 18%.”
In the meantime however, Seadrill paints a gloomy picture as energy companies are spending less which for some, is resulting in a negative real cash flow situation. This coupled with the “relatively high dividend payout and increasing development cost to bring new production on stream, oil companies have limited opportunities to fund exploration activities,” says Seadrill.
In the near term, this isn’t good news for Seadrill however, with lower capital expenditures on E&P activities and downward trending production levels, the supply-demand balance will get tighter in the future, potentially giving rise to another upward trend in oil prices, and thus demand for their offshore drilling services, says Seadrill.
And Seadrill is banking on an increase in activity level from their clients.
For the offshore driller, a total of 17 new ultra-deepwater drilling units are scheduled to be delivered from the shipyards in 2015 and 2016, and these units represent the most promising growth area within the offshore drilling sector. According to Seadrill, oil and gas production in ultra-deepwater regions (>7,500 feet) currently stands at around 1 million boepd. This production level is serviced by approximately 130 rigs worldwide. By 2020, production from the ultra-deepwater is expected to rise by an average of around 30 percent year-on-year to 5 million boepd.
This increase in production will require new rig capacity in order to achieve it, says Seadrill.
Acknowledging the fuzzy-looking future of the deepwater drilling market, Seadrill notes that they do not intend to order any further rigs until further market clarity is gained. At present, the company has 20 rigs under construction and in 2013, the company took delivery 0f 13 newbuilds, all of which are under contract.
Another promising sector for Seadrill includes the Mexican shallow water drilling market where Seadrill recently entered into a Heads of Agreement with PEMEX for 5 potential jack-up contracts reflecting a total of 30 rig-years. Should this materialize, it could have a total revenue potential in excess of USD $1.8 billion.
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