So you can now buy three (3) five-year old ultra-deepwater drillships for the price of one new build jackup out of China!
Ex-Schahin ultra-deepwater drillship Cerrado went under the hammer and was sold to the only bidder at the reserve price of $65 million, a bargain basement price if there ever was one. Quite a punt by Ocean Rig betting on the eventual recovery of the ultra-deepwater market which is the drilling industries worst performing sector in the current downturn.
An earlier auction, for Odfjell operated drillship Deepsea Metro 2, also just five (5) years old, failed to elicit even one bid. But then, by comparison, the reserve price had been set to a whopping $175 million, almost three times higher than the reserve price for the Cerrado. To put this into context the published construction costs for the Cerrado (now Ocean Rig Paros) and Deepsea Metro 2 were $678m and $652m respectively. Some depreciation. Deepsea Metro 2only had three years of operations under its belt and the Cerrado only managed three years out of a ten-year contract before it was early terminated by Petrobras.
So where does this leave the likes of Hyundai, DSME, Jurong, Samsung and COSCO, all of whom have UDW units that have had their construction contracts terminated by their original owners. Add to this list of unwanted assets the KeppelFELS speculative drillshipCan Do plus potentially any of the near-to-completion rigs that were ordered by Sete Brasil which may be left to Keppel and Jurong to find alternative buyers if they choose to complete construction. Then there is still the possibility of further cancellations of other units currently under construction. The construction costs for the seven (7) rejected ultra-deepwater rigs are stated as between $672m and $740m. One of these, the ill-fated Dalian Developer must have cost its various owners a combined number in excess of $2 billion as it has been under various stages of construction and bankruptcy since January 2006. The news of the Cerrado sale must have reverberated around those shipyards with assets for sale, causing a high degree of heartburn.
And how does this market sector look today? For rigs capable of drilling in 7,500ft water depths or more and excluding Brazilian owned units which, at least at present, do not compete in markets other than within Brazil (honorary exception SSV Catarina), the worlds competitive fleet consists of one hundred and fifty-seven (157) ultra-deepwater semi-subs and drillships. There are a further twenty-six (26) in various stages of construction, only five (5) of which have contracts to go to. Many of those under construction have had their delivery dates pushed back into 2017 and even as far back as 2020. As mentioned above seven (7) of them have had their construction contracts cancelled with ownership reverting to the shipyard.
Of the competitive fleet; i.e. excluding those under construction, 42% are currently out of work, that is sixty-six (66) units listed as “available”, although five (5) do have contracts to go to later in the year. Another eight (8) are currently stacked/on standby on contract and a further fourteen (14) units have contracts that terminate in the second half of this year. Of course even having a valid contract is no longer any guarantee that you will be working until the end of your contract; of the seventy-one (71) cold stacked/warm stacked and recently scrapped UDW units, thirty-one (31) or 43% of these suffered early termination of contract. So unless there is a rush of fixtures this year, a highly unlikely event, there will be just under 50% of the competitive fleet out of work and “available,”
It is not just the threat of early terminations. Many operators have forced contractors to lower their dayrates through blend-and-extend deals or straight forward ultimatums. From a high of $640,000 a day in the halcyon days of the not too distant past the most recent fixtures have been as low as between $190,000-$250,000. Adding to these woes are the cancelled and postponed deepwater projects, slashed budgets from the operators, cessation of exploration work and a fluctuating oil price that is still nowhere near the level needed for the deepwater market to recover.
All in all, is this a brave move by Ocean Rig or a foolish one? There was certainly no interest from their peers in either rig that was put up for auction, even at $65 million.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)