Drillers showing good margins in 2nd quarter
For the second consecutive quarter, drilling contractor's profit margins are showing good strength. The vast majority of the drilling contractors have reported increasing earnings, signaling a definite end to the drilling slump of the past year.
During Q1-2000, while most operators were posting record earnings, almost every major drilling contractor posted a sharp decline in earnings fromQ4-99 - down an average of $13.58 million. But, while this was a notable decrease from the previous year, from the fourth quarter of 1999 to the first quarter of 2000, most earnings were greatly improved, showing a steady trend that the sector was getting back on track.
With second quarter earnings, the sector is on the rise. Almost every driller showed an increase from the previous quarter and narrowed the difference from the previous quarter of last year. Some, such as Global Marine and Ensco, have beaten analyst expectations.
The rise has been attributed to producer plans to increase E&P spending due to firm prices, increased demand for oil and gas, and weakness in production capacity. BP Amoco, for one, said that it was raising capital expenditures to $13.5 billion per year. Bob Rose, Chairman, President, and CEO of Global Marine said,"The combination of high commodity prices and expectations for growing worldwide energy demand is yielding increased capital spending by our E&P customers and continued momentum for the offshore drilling recovery that began in the latter half of 1999."
Another boost to the drillers has come from the jackup market. With natural gas prices at record highs, drilling activity in the shallow water, gas-prone areas has picked up. "Spot day rates for premium jackups in the Gulf of Mexico have increased about three-fold from a year ago. The jackup market in West Africa has also begun to tighten," added Rose.
This additional help from the jackup side is further proven with Global's SCORE (Summary of Current Offshore Rig Economics), which compares the profitability of current mobile offshore drilling rig rates to the profitability of rates at the 1980-81 peak of the offshore drilling cycle. At the time the second quarter earnings were released, the SCORE for jackups had risen 5.7% from the previous month and 54.7% from the previous year.
Worldwide, Global reported that the SCORE for all types of drilling rigs increased 4.3% from the previous month and increased 28.3% from the previous year.
While the deepwater remains stable, and the jackups are providing a boost, mid-depth semisubmersible drilling unit leasing remains low. As a result, companies heavily positioned in that market are still feeling some of the residual pain. One such company, Diamond Offshore, which owns and operates 30 semisubmersibles, had earnings fall by 93%. In a conference call, Larry Dickerson, President and COO of Diamond, attributed the main decline in the earnings to the mid-water depth market weakness.
However, with the increased E&P spending, the mid-water depth market is next on the list for improvement and should promote a strong third quarter, if not a full recovery of the sector.
BP Amoco rig problems
BP Amoco has been in the center of some rig-related problems of late. The company's contracted rig, the Discoverer Enterprise drillship, has gone back to work. Earlier, BP Amoco had submitted a "notice of default" styled letter to Transocean Sedco Forex regarding the five-year contract on the rig due to incidents of "non-productive time resulting from equipment problems pertaining to the rig's BOP." Now, according to Transocean Sedco Forex, the equipment has been replaced, tested, and is back in operation.
But now that it has one rig in operation, it will be even longer before the company gets another of their contracted deepwater rigs into service. Diamond Offshore and BP Amoco recently signed an agreement modifying the contract on the Ocean Confidence deepwater semisubmersible presently under construction at the TDI-Halter yard in Sabine Pass, Texas. The modification in the new agreement provides for an extension of the delivery date, from July 1 to Dec. 1, to allow Diamond time to complete and test the rig.
In return, Diamond will accrue a penalty based on the delivery date of the rig and has agreed to additionally accrue an obligation to BP Amoco for certain types of downtime, which could occur during the first two wells of the contract. These accruals would reduce revenue payments to Diamond by BP Amoco during the contract. If delivery does not occur until the Dec. 1 deadline, the maximum reduction of the revenue would be $6.1 million. Diamond, however, expects delivery by the end of this month, which would only be a reduction of $3.6 million.
