January 31, 2023

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Levels you could hardly dream of - E24

Levels you could hardly dream of – E24

The excavator market is rising strongly again after the crisis years, with the price level doubling from last year. Analysts believe that the next step in the recovery will be profits from drilling companies.

Positive for RIGG: Analyst Christopher Mo DeGee at Pareto Securities.
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“You can safely say that these levels would have been unimaginable 12 months ago and you are now just under 10 percent of the levels you saw between 2005 and 2010,” Christopher Mo Dejie tells E24.

Together with fellow analyst Bård Rosef at Pareto Securities, he notes that the rig industry is moving in earnest again after several years of crises.

It was confirmed this week that New York-listed drilling giant Transocean has been awarded contracts for two of its deep well drilling rigs for four and three years respectively, worth $583 million and $456 million.

That’s the equivalent of $400,000 per day and $416,000 per day respectively, nearly double the price levels through 2021, according to Pareto Securities.

Figures from analysis firm S&P Global show that prices for vessels drilling for oil in deep waters have jumped about 40 percent since the summer.

Read on E24+

Positive trends: – The market will continue to consolidate

Suddenly tight

– When there are such large fleet cuts and demand rebounds, it suddenly becomes tight, says analyst Tommy Johansen at Sparebank 1 Markets.

Johansen explained that the explanation for the rise in the rig market is that companies got rid of many rigs during the downturn in recent years, while demand is now rising.

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He says that the utilization of the fleet of drilling vessels has exceeded 90 percent, which raises the daily rates.

The analyst believes that the rally came quickly.

– In early 2021, most contracts were at a low of 200,000. The high to 400,000-plus came in a short time. Rates were much lower before the summer.

Although prices have risen a lot, debt, among other things, is putting limits on dividend payments at a number of drilling companies, according to the analyst.

– You will not see profits immediately. But when companies are refinanced in the future, it will be possible to open them again. I think it will be the next step in the recovery, when you actually get the cash flow.

– Expect some upside

Falling oil prices, the situation related to Corona, and budget cuts in oil companies hit oil suppliers hard last year. This year, however, the price of oil has skyrocketed and is now around $80 a barrel.

Between 2011 and 2013 the rates were highest, and here they are still high, at 30 percent. Pareto Securities does not rule out further jumps from current levels.

– We expect there to be some upside to the price levels we see today, but in the historical context one should not take it for granted that we are now starting to approach a very nice level in terms of earnings, analysts at Pareto commented.

The contracts with Transocean are for the Deepwater Corcovado and Deepwater Orion drilling rigs off the coast of Brazil.

New contract: Transocean Corcovado drillship.

– Brazil is a large international buoy market, and although it has its own characteristics, it perfectly represents the developments in the global rig market.

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– We expect another increase in the level of activity there, and Petrobras has indicated that it will increase Capital expendituresCapital expendituresinvestment costs. From now on (increased by 15 percent recently until last week). Brazil is somewhat older than other markets, but we’re seeing the same trends globally, Deje and Roseff emphasized.

Pareto Securities believes that Transocean is “strongly positioned” in a “strong recovery market.”

Transocean’s stake is up about 18 percent on Wall Street this year at $3.67. The target for Pareto Stock is $6.

Very low rating

It’s been known for a long time that Transocean will award these contracts, but it’s positive to see them materialize and they’re listing the contracts in the order book,” says Johansen at Sparebank 1 Markets.

The drilling vessel market has been the strongest segment of the rig market over the past year, says Johansen, with a sharp rise in prices since the summer.

With costs of about $150,000 a day, the rig would be able to generate a gross operating profit (EBITDA) of $85 to $100 million a year, he calculated.

– If you look at the implied value of rigs on the stock exchange today, the valuation is very low compared to the daily prices we’re seeing right now.

– Stock prices do not reflect how strongly the rig market has recovered, he said.