Advanced Drillships Burden as Oil Prices Fall

Not so long ago, advanced drillships costing more than half a billion dollars each and capable of operating in ever-deeper waters practically guaranteed big profits for oil-rig operators.

Now, with oil prices down by half since June, many have become a burden on their owners as drilling activity slows.

Drillship operators face a more brutal hit to margins than they did after the oil-price crash of 2008 because of the huge cost of maintaining the more than $10 billion worth of state-of-the-art vessels that have been idled at sea, analysts say.

Noble Corp Plc, Ensco Plc and Transocean Ltd are among companies that have invested in advanced rigs which, unlike older jack-up rigs that attach to the ocean floor, rely on dynamic positioning systems using thrusters to keep them in position.

And it's these thrusters that are the problem. They need to be removed to allow the rig to be parked in the shallower waters of most harbors - a costly and difficult process.

This means that in most cases, owners need to keep rigs at sea with a crew and the thrusters running even when there's no work.

Maintaining an idle dynamic-positioning rig costs up to $200,000 a day at sea, compared with less than $100,000 for older rigs that can be towed to port, according to industry estimates.

Noble has retired one rig with a dynamic positioning system, which was built in 1981 and last upgraded in 2006. The cost of repairs and maintenance "did not make sense," spokesman John Breed said, citing the rig's age and limited technology.

As overhead costs rise and work becomes scarce, margins are shrinking.

Diamond Offshore's net margins, for example, are expected to shrink to 8.6 percent this year and 4.8 percent in 2016, according to Deutsche Bank. That compares with about 37 percent in 2008 and 2009.

The drop could be just as dramatic for Noble, Transocean and Atwood Oceanics Inc, according to Reuter’s calculations.

Atwood, though, could be better positioned than its rivals, and may be the only major offshore driller to post a higher net profit this year, according to Thomson Reuters I/B/E/S.

With more than half its drillships built in the last five years, the company has one of the most efficient fleets in the industry. Still, Atwood has delayed the delivery of two rigs because it is cheaper to pay parking fees at shipyards than to pay for maintenance on uncontracted rigs.

The company will pay between $15,000 and $50,000 per day to maintain these rigs, Chief Financial Officer Mark Mey said.

Currently, 192 rigs around the world are equipped with dynamic positioning systems, compared with 71 at the start of 2009, according to Evercore ISI analyst James West.

Of these, about 26 have been idled at sea or shut down altogether. Eight are owned by Transocean and five by Ensco, while Diamond Offshore Drilling Inc and Noble each have two out of work.

"Expect more delays in rig deliveries and continued rig stacking, compounding already falling margins," said David Zusman, chief investment officer at Talara Capital Management.