Merrill has been consistently bearish on jackups
String of hot-stacked jackups hit the market
After roughly 3 years of 100% international jackup utilization (only exception was Shelf
Explorer hot stack late last year), three intnl jackups have now gone idle. The 300’ ILC
Ocean Heritage in Qatar, 2007-built 350’ ILC Deep Driller V in SEA and 250’ ILC Rig
103 in the UAE are all without work (Driller V goes hot stack next week). For the last
six months the Street has wrestled with mixed data points and waffled on the fate of
the global jackup markets. These three rigs - plus KS Energy’s $120k/d rate on a 300’
ILC - should send a clear message: the rollover is well underway, and will only get
worse through the year as new supply hits the market.
Troubling sign: weakness begins b/f new capacity arrives
We’ve been bears on the intnl jackup market since July 07, but we’re still surprised to
see idle rigs ahead of delivery of most new builds. This jarring development indicates
operators are waiting on the sidelines to “see what happens”, which we think spells
trouble for the balance of the year. As we noted in our March 11th piece (Convergence
of availability to cast pall), a perfect storm of availability will hit the WW jackup markets
in 2H08 as new builds deliver, existing jackups complete contracts and GOM ILC units
continue to bid for intnl work. If demand cannot fully absorb supply today, imagine what
happens when we add 30+ rigs and a big chunk of existing capacity to the bidding
game in 2H08. Our call for a 15-25% drop in rates may prove conservative.
These aren’t exactly rinky-dink jackups
The jackups that have gone idle are premium or ultra-premium units operating in key
markets; these are not mat rigs in the Gulf of Suez. The Deep Driller V is a brand new,
Keppel Fels 350’ Super-B class jackup delivered in 2007. The Ocean Heritage is one
of DO’s highest-spec jackups and was just working at $178k/d in Qatar. Apparently it
has been bidding for work in the $140k/d range, to no avail. The Rig 103 is an ILC
jackup that was earning $170k/d in one of the hottest markets (Mideast).
Sell Rowan and ENSCO, weakness not priced in
We reiterate out Sell ratings on the two most leveraged US drillers to the premium intnl
jackup market: Rowan (RDC, $39.23; C-3-7) and ENSCO (ESV; $62.30; B-3-7). Some
bears who share our jackup view fear the rollover is already well understood. We
disagree. We continue to hear from several investors who believe in rate sustainability;
just look at stock performance since January lows for RDC (+23%) and ESV (+28%) to
see the bullish viewpoint in effect. Consensus estimates are too high for both, we think,
and multiples continue to price in earnings growth through 2010. We see 2009 as the
peak for both (maybe 2008 for ESV) and calculate fair value for RDC at $32-34/sh and
ESV at $47-49/sh.
Talk from Mexico remains glum, may hurt US too
Mexican expectations continue to progressively drop. Pemex was initially viewed as a
key driver of incremental jackup demand (10-12 rigs), then as a modestly positive
driver (+5) of late. Now we’re hearing a flat count may be a best-case scenario.
Several factors are at play: 1) The gov’t continues to siphon cash from Pemex for other
needs; 2) Pemex has shifted focus to deepwater and land; 3) Pemex is more inclined
to swap mat jackups for ILCs than add rigs. Right now there’s a dearth of tendering for
extensions on current rigs, and in some cases jackups may be up for cold stack. Look
out for PDE’s and NE’s 1H08 contract roll-offs with Pemex (Alabama/Colorado for
PDE, Jennings/Frederickson/Dugger for NE). We’d also note that a high-grading away
from mat rigs could mean capacity is on its way back north (see Pride Nevada), a
d isconcerting prospect for the US mat market. |
