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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: sand wedge who wrote (17042)3/29/1998 12:53:00 AM
From: Big Dog  Read Replies (3) of 95453
 
jbe -- You bring up an interesting situation.

There are two ways of looking at how driller make money. One is they spend 300 million on a new rig and have it paid for in 6 years with all the money from the day rate. In this case they don't "really" make any money until aftetr the rig is paid for. (I don't know how accountants deal with this.) Then after the rig is paid for they make a shit load of money for as long as the rig works -- 30+ years. Even if day rates go down 50% they are still kickin butt at the bank -- as long as the rig continues to work.

Plus of course the rig has some residual value of an undetermined amount...the amount will be directly dependent on the earning power of the rig at any given point in time. (In doing rig appraisals, I consider the earning power of the rig the most vital indicator of the rigs "value". Replacement cost, willing buyer/seller and other methods are secondary in my opinion.)

The other way of making money is to amortize the capital expense over the life of the rig. This way they don't "really" pay off the rig in 6 years, they just make awesome profit. The trouble with this method is you must determine today what is the residual value of the rig at the end of the period of depreciation. No way Jose can this be done with the slightest degree of accuracy. Can anyone tell me what a drillship will be worth in 5 years? Much less 35 years. Any estimate is a blind ass guess.

So in order to achieve an acceptable rate of return -- if it ain't at least 12% you might as well be doing something else -- you have to calculate how much day rate and what degree of utilization you are going to average for that rig over the next 30+ years. Try doing that and coming out right.

The reality is the second scenario -- due to accounting methods -- I presume. Since drillers are reporting these quarterly profits they aren't "really" paying off the rigs. They are booking profits...and what is it that they are doing with these current profits? This is the money they are supposedly using to pay off the rig they just bought.

What happens in 7-8 years if the market takes a dump down and these companies still have a boat load of debt on these rigs they were supposed to already have paid for. Now they may not be making enought to service even the debt -- much less make a profit. They took all the profit from the fat years and did what with it?

They bought more rigs. So now they have even MORE debt that they can't pay.

It could turn very ugly if this happens.

The Good, The Bad, The Ugly and The Big Dog.

Every dog has its day.
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