The forecasted and inevitable merger and acquisition season appears to be amongst us. We have already seen an increasing number of acquisitions of individual distressed rigs over the last year or so by the likes of Advanced Energy Systems, Arabdrill, Vantage, Ocean Rig and White Fleet Drilling, but company mergers have been dormant through the worst part of the downturn. But with green shoots of a recovery now evident, and with a host of distressed or restructured companies around, M&A activity is underway.
After Borr Drilling bought out Transocean’s jackup fleet plus a couple of distressed jackups from Hercules, Transocean turned around and is investing the money into Songa Offshore. This follows the earlier acquisition of Atwood Oceanics by Ensco.
The Ensco / Atwood merger does has an impact in this region, providing Ensco with a strong presence in Australia where they have been a regularly occasional player since early 2000’s, often the half rig in a one and a half jackup market. They will now have a firm floater presence there. The Atwood jackup fleet, all modern premium rigs, will allow Ensco to phase out more of its older fleet, most likely their present five (5) cold stacked jackups. Ensco has already scrapped nine (9) of its jackup fleet and sold off at least four (4) others.
Transocean obviously have their sights on dominating the harsh environment floater market with their $3.4bn acquisition of Songa. Songa have four (4) very modern semis all on long term charters with Statoil in Norway as well as three (3) 1970/1980 vintage mid water floaters that are currently idle and which Transocean will surely scrap, probably with a few more of its own elderly floaters. Until this happens Transocean will operate a fleet of fifty one (51) floaters, with thirty (30) UDW units (and four (4) more under construction), eleven (11) harsh environment floaters, three (3) deepwater floaters and seven (7) mid water floaters. The Songa acquisition also strengthens Transocean’s footprint in Norway.
With sixty (60) different drilling contractors operating floaters and one hundred and twenty (120) jackup drilling contractors around the world, there is a lot of scope for further M&A activity. Naturally the Ensco and Transocean deals have stimulated much speculation by analysts as to who is the next in line. Odfjell seems to be a common pick to be on Transocean’s radar but their roster of prime acquisition candidates includes Ocean Rig, Pacific Drilling, North Atlantic Drilling, Seadrill Partners and Seadrill itself, Maersk Drilling, Rowan and Noble. Maersk Drilling may have just leapt to the top of the list with Total having just acquired Maersk Oil, giving the impression that Maersk are exiting the oil and gas sector.
But who are the buyers? The analysts are suggesting Diamond, Rowan, Noble, Ensco, Seadrill (after restructuring), Borr Drilling as well as Transocean. One thing is for sure, no-one is going to buy out a company with a fleet of 1980’s vintage rigs unless they are mixed in with an attractive number of modern premium rigs. We certainly need consolidation, especially in the jackup market, but it is hard to envisage the number of contractors being reduced by very many when most of them operate thirty (30) year old rigs or older. But the jackup market, with near one hundred (100) stranded new builds yet to be cut lose into the market, is not going to improve until the old rigs are scrapped and this means many contractors will also have to fall away or invest in the new rigs and scrap the old.
However. the big boys are definitely preparing for an upswing in the market. There is no doubt the rig market is going to look very different a year from now. Meanwhile we are all guessing who is next.
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The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.