Pritchard Capital
Top fundamental long ideas remain: Halliburton Company (HAL - $34.54), Cameron International (CAM - $52.94), and Superior Energy Services (SPN - $28.63). Merely six months ago we were contemplating ultra-deepwater dayrates that were approaching $500,000 and premium jackup rates in the $120,000-$140,000 range. Recently, rates for those two classes have increased: for UDW drillships, the relevant range is now approaching $550,000 at the lower end and bids are beginning to exceed $600,000 at the high end (and as high as $695,000 for an option beginning in November 2014).
As for jackups, that band now stands at more like $140,000 to $160,000. Although defining dayrate ranges is imprecise -- due to issues including term, location, and rig specifications – we view the trend in rates as rising rapidly. The main driver of this increase is growing demand for such highly capable rigs. Interestingly, high spec rigs are not universally deployed in applications that test their technical limits. There are certainly plenty of examples of rigs working in water depths that simply exceed the depth capacity of the competition. In other cases though, such newer rigs are working in relatively more conventional applications, but are able to complete such work with efficiencies that justify otherwise premium dayrates. Accordingly, utilization at the upper end of both floaters and jackups is high.
We recognize that all of the rate increases are not all flowing to the driller’s bottom line as margin. Wages continue to increase, we estimate by mid-single digit percentages. The higher cost of fuel no doubt flows through as an indirect component of consumables, supplies, and maintenance. Nevertheless, a meaningful portion of the accretion in dayrates will bolster driller margins as they are realized. A derivative beneficiary of this rate environment is the equipment industry. First, higher dayrates (and returns on capital) will likely result in additional newbuilds.
The content opportunity on a newbuild drillship (with a single BOP stack) can run as much at $250 million, and a spare BOP stack, handling equipment, etc. could drive that figure closer to $300 million. Second, we think newbuilds will be increasingly equipped with spare BOP stacks as well as spare BOP control pods. The cost of downtime related to BOPs can justify the additional capital for such spares. We think up to 70% of rig downtime is associated with the BOP. |
