TODCO carries momentum into 2006 with reactivation of seven cold-stacked rigs
David PaganieSenior Editor
Company anticipates 800 new employees by end-2006
TODCO secured contracts for reactivation of seven rigs (six in GoM) in 2005 and expects to reactivate most of its 16 remaining GoM-based cold-stacked rigs (six jackups, 10 inland barges) against term contracts by 4Q 2006. The company anticipates that it will hire an additional 600-800 personnel over the next six to nine months to accommodate its current and anticipated reactivations.
TODCO’s exceptional performance in 2005 and outlook for 2006 is a clear indication of tight market conditions in the GoM shallow water drilling market. The drilling contractor announced the reactivation of seven cold-stacked rigs against term contracts in 2005; six for operations in the GoM, and one for use offshore Angola, and is confident that it will secure contracts to justify the reactivation of most of its remaining cold-stacked fleet based in the GoM by the end of 2006.
Offshore sat down with Jan Rask, president and CEO of TODCO, and Scott O’Keefe, executive VP, Finance and Administration of TODCO, to get the full story.
From R&B to TODCO
TODCO’s drilling rigs were originally included in R&B Falcon’s fleet. In January 2001, Transocean purchased publicly traded R&B Falcon. In July 2002, Transocean announced that it intended to divest its shallow water assets through creation of a public company later named TODCO.
TODCO's Rig 48, a 3,000-hp posted inland barge.
TODCO then completed its initial public offering in February 2004 at $12/share with Transocean selling approximately 22% of its ownership in the newly formed company. After an additional three public offerings and work to consolidate assets and personnel into a new, separate entity, by May 2005 Transocean had sold the remainder of its interest in TODCO.
The contractor started with a fleet of 70 drilling rigs, with a majority of them being marketed in the US. Today, the company owns and operates 64 drilling rigs (24 jackups, 27 inland barges, 3 submersibles, 9 land, and 1 platform), with 48 based in the US. The company says its core focus is to drill for natural gas in the shallow waters along the US Gulf Coast.
Gulf supply constraints
The US GoM jackup market began experiencing supply constraints in 2001, according to Rask. “In 2001, the US GoM jackup supply consisted of approximately 160 rigs, and the fleet was operating at around 100% utilization,” he said. “Shortly thereafter, gas prices fell sharply forcing rigs idle. But, oil prices held up at profitable levels, which generated an overseas market demand. As a result, approximately one-third of the GoM-based jackup supply left over the next three to four years, for long-term contracts at high day rates.”
During that period when jackups were actively leaving the Gulf, Transocean elected to cold-stack its fleet of jackups, which as mentioned earlier are now included in TODCO’s fleet, leaving it as one of the only contractors in the region with a healthy stash of cold-stacked equipment.
More recently, Hurricanes Katrina and Rita contributed to the diminishing trend of jackups when they blasted through the Gulf, destroying a total of eight rigs.
Currently, the supply of jackups capable of operating in the GoM consists of approximately 100 units, according to Rask. And like the economic constraints experienced in 2001, all of the jackups that can work in the GoM today are working, he added.
TODCO’s position
TODCO is well positioned to offset the Gulf’s economic constraints with its cold-stacked fleet available to be reactivated in a short period of time. “Generally it takes about three to four months to reactivate a rig,” said Rask. Also, if you were to place an order for a new jackup today, it might not be delivered until 2008 or 2009, he added.
However, it’s not cheap to keep a rig actively marketed, especially if it’s idle, said O’Keefe. “To keep a rig marketed whether it’s working or not costs you about $20,000/day vs. $1,500/day in cold-stacked mode,” he said.
The type of company operating in the shallow waters of the Gulf has changed over the years as well, according to Rask. “The demand for certain types of rigs in the GoM has changed because it is a mature basin,” said Rask. “As a result, there has been a transfer of our customer base from large oil companies to smaller oil companies who are typically more cost-conscious. These types of companies usually elect to contract a rig that meets technical requirements for a specific drilling program rather than over-hire, i.e. getting too much rig at a higher cost. And TODCO’s rigs can perform most drilling demand in the shallow waters,” he said.
TODCO's THE 204, a 200-ft mat cantilever jackup.
According to statistics provided by TODCO, today’s leading edge day rate for a 200 - 250-ft mat-supported jackup is around $90,000. Incidentally, at this rate its customers generate well over a 200% rate of return at current natural gas prices.
Today’s average day rate for TODCO’s jackup fleet is in the mid-60s, according to Rask. The average day rates for these rigs were in the high 30s in early 2005.
TODCO adds that it is strategically positioned to accommodate its customers’ need for deep gas drilling as well with its inland barge fleet. The company owns and operates 16 of the 20 inland barges with 3,000 hp capable of operating on the Gulf Coast, making them the largest inland barge contractor in the industry. According to TODCO statistics, day rates for 3,000 hp inland barge rigs have increased from the low 20s in late 2004 to the mid 30s in late 2005.
“Today the GoM is a solid market for us and we think it will continue to be so for the foreseeable future,” said Rask.
Contracting strategy
TODCO is very clear when asked about its strategy for rig reactivations. “We will only reactivate a rig when term contracts are obtained that basically pay for the reactivation,” said Rask.
The drilling contractor says that because it works the spot market in the shallow waters of the Gulf, it is subject to increased day rates when it renegotiates a new contract. “You want to be in the spot market when the day rates are heading north,” said Rask.
Because the contracts are generally short-term, the company is not locked-in at a given rate for a long period and can, therefore, take advantage of a rate increase. “For our current marketed fleet, our strategy tends to lean towards variable rate adjustments during a fixed period contract,” added O’Keefe.
Alternatively, “for cold-stacked equipment to make sure we can get the money back that is required to reactivate the rig, we enter into a fixed term contract, meaning that the day rate is fixed over the duration of the contract period,” said Rask.
Personnel
O’Keefe and Rask both addressed the topic of a potential shortage of personnel to accommodate their needs for the reactivations. “We stepped up our recruiting efforts several months ago for the reactivations,” said O’Keefe. We added an extra buffer with our increased recruiting so when we have to reassign personnel we won’t have any shortages in the field. Rask also mentioned that they anticipate the hiring of up to 800 new employees by the end of 2006 for the reactivations.
Looking ahead
“The GoM is predominantly a natural gas play, and demand for natural gas domestically continues to increase,” said Rask. “It is anticipated that this trend will continue at least for the next five years, which should facilitate a stable jackup market in the Gulf. Demand for jackups in the GoM will likely sustain levels anywhere from 80-110.”
The company plans to continue its strategy in the foreseeable future, which is to “drill the small gas prospects.” “These types of wells can be very quick to first production and provide great returns,” said Rask.
Some of the contracts that TODCO secured in 2005 included upgrade work, which improves that rig’s marketable position. “The real upside for a reactivation and upgrade contract is that at the end of the commitment you have a good working rig that is in better shape than it was before,” said O’Keefe.
Equity research analysts Raymond James and Associates anticipate a positive outlook for TODCO as well. In a recent report, the company said, “TODCO continues to possess significant earnings leverage, given its status as the swing supplier in a GoM jackup market that is experiencing a meaningful step-change in day rates.” They also reiterated a “strong buy” rating for the company and a 12-month price target at $69.•
