P.2 ~ Offshore drilling market faces an uncertain year

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The names on the accompanying list of the Top 10 drilling contractors by number of rigs are similar to those presented last year, with a few noted changes. Noble, No. 2 last year, dropped to ninth place as it now possesses fewer rigs, due to its recent spin off of Paragon Offshore, a standard offshore drilling company. Paragon has entered the list at No. 6, as well as COSL Drilling Europe AS and Shelf Drilling, a private company headquartered in Dubai.

The number of rigs under construction has continued to grow, but is lower than last year's numbers, for a total of 36. This growth has been driven by a number of new high-specification jackup orders.

Now that commodity prices have declined, the industry will see a direct effect on the jackup market, which is a different experience from last year's overview. "We don't think that the jackup demand is going to help keep rates like it did in 2014, especially if the commodity prices stay low," Odell observed. "Further impacting the problem for this market is the influx of rigs that are scheduled for delivery. There are over 70 jackups that are scheduled for delivery in 2015 alone."

If all of those jackup rigs actually come out on the market on time, with commodity prices so low, that would be a huge problem, Odell comments. "Rates would plummet. These newbuilds would either be canceled or be delayed. There's not a demand in the market for another 70 rigs."

As for what to expect with the newbuild contracts and/or orders, Odell states that as delivery dates approach, drillers are going to be cautious, resulting in a case-by-case basis. As the year progresses, the industry will have a more defined picture of what to expect going into 2016.

While the ultra-deepwater arena typically has weathered the storm in past down cycles, it is predicted that this will ring true again, near-term. "We're not expecting for the UDWs to be cold-stacked this year or next," she added. "Those rigs will likely have either small gaps or work down specifications. By that, I mean the rigs that are capable of working in water depths greater than 7,500 ft [2,286 m]."

As for floaters, many already have contracts in hand, but the industry will expect to see re-negotiation of the daily rate or terms adjusted to make it more palatable for the operator and contractor. For those coming out of the shipyard without contracts, expect to see some time gaps, but they will not stack them right away, Odell says.

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Transocean, which came in at number one on the list, recently provided an update on its activities. In conference calls with analysts last quarter, Transocean officials stated that the company's newbuild program remains on track, with near-term drillship deliveries backed by long-term contracts at "attractive" day rates.

Transocean received encouraging interest from customers for five of its speculative jackups that are under construction. "We will continue to pursue corporate contracts for the 2016 and 2017 deliveries," said Steven Newman, Transocean's president and CEO.

As for the company's non-core fleet, Transocean intends to scrap certain cold-stacked rigs, recognizing their limited potential to re-enter the market, while continuing to assess the competitiveness of non-core assets on a case-by-case basis with the likelihood of retiring additional rigs.

The company announced it signed a one-well extension on theDiscoverer Enterprise drillship with a rate of about $398,000 per day. The agreement also includes four, one-well pricing options.

Bonno added in the analyst call that UDW day rates and utilization have remained under pressure while customers continue to focus on short-term cash flows and capital allocation. "We are pleased to see the supply of available rigs decline as a result of the recent and expected announcement of contract awards in Brazil, US Gulf of Mexico and West Africa," she said. "However, we continue to expect challenging conditions as we work to contract our rigs in an oversupplied market, and are likely to experience inter-contract idle times and significant competition on the limited tendering opportunities available."

Bonno added that deepwater and mid-water markets remain weak as higher-specification units compete for lower specification jobs, with the expectation that this will drive older, less capable units out of the market and additional units will be retired.

The company also expects Petrobras to announce the Libra field development tender winners, which could involve up to three Transocean rigs in 2015.

As for other geographical areas, in 3Q 2014, the company secured a contract for its deepwater semisubmersible Jack Bates in Australia, with hopes of securing three long-term tenders in India in the very near future for rigs capable of drilling in 5,000 ft (1,524 m) of water.

Midwater and harsh environments tendering activity also remained slow in 3Q 2014, and Transocean expects it to remain that way in 2015. "The recent contract terminations and suspensions by Statoil in Norway, the Russian sanctions, delayed programs, and limited programs overall continue to challenge the UK and Norwegian market," Bonno commented.

TheTransocean Spitsbergen recently received a contract suspension notice from Statoil, reducing the day rate by about 25%. The company recently secured a four-year contract for the Transocean Leader in the UK. The rig will move south upon completion of her contract in Norway. The rate is favorable, say Transocean officials, as the first three years will be paid at a rate of $335,000, and the last year will be at a rig market rate between $335,000 to $365,000 per day.

In October 2014, Transocean signed a contract to returnTransocean Amirante to work on a one-year charter in Libya at a rate of $335,000 per day.

Transocean also extended the contract forTransocean Honor for one year at a rate of $194,000 per day for work in Angola, but it expects new fixed rates to decline for high-spec jackups over the next 12 months.

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