News:Coastal Won't Take Options on Two Ensco Rigs
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Top Stories: Coastal Won't Take Options on Two Ensco Rigs
By Mavis Scanlon
Staff Reporter
4/6/98 8:17 PM ET
Underscoring the increasingly tough oil services market, Coastal (CGP:NYSE) will not be taking options on two jackup rig contracts with Ensco International (ESV:NYSE) in the shallow-water region of the Gulf of Mexico.
Although Ensco says options and contract renewals come and go in spurts, the $4 billion drilling and services company may be forced to contract those rigs at lower dayrates due to growing concerns over softness in the jackup rig market. Indeed, one person familiar with Coastal's decision said it stemmed primarily from a belief that Coastal could get lower rates elsewhere.
Dayrates, simply put, are the what an oil company pays a driller to operate a rig per day. When oil prices are high, dayrates tend to rise. As oil prices decline, as they have in recent months, dayrates come under pressure, altering the dynamics of the drilling and services industry.
Ensco had three rigs working for Coastal in water depths of 215, 157 and 163 feet, according to the March Offshore Rig Locator. One contract ended on April 1, and has been renewed through July at a dayrate in the high $60,000 range, the company says; a second is slated to wind up April 12, and is currently being marketed to other operators; and a third, which the Ensco says it should find out from Coastal very soon whether it will be renewed, will wind up on May 1.
Ensco's trouble is likely to become familiar to many drillers with large jackup fleets. On the eve of a crucial earnings season, analysts and investors will hunt aggressively for any hints of softness or decreasing dayrates. Although earnings for companies with deepwater, natural gas and international exposure should be relatively immune from fears connected to crude oil, those with exposure to onshore, and increasingly, shallow-water projects on the continental shelf are coming under greater pressure. Typically, oil-related onshore and shallow-water projects are less capital intensive and thus more easily delayed in low-price environment. The weekly Baker Hughes Rig Count, released Friday, indicated 43 fewer rigs drilling in the Gulf of Mexico against one year ago, highlighting concern about more marginal drilling projects in the Gulf. The number of rigs drilling for oil was down 89 last year, while the number of rigs drilling for gas was actually up 44 over last year.
"Ensco now has to go out and find contracts for two rigs they thought were going to be contracted," says Jim Wicklund, who follows the sector for Dain Rauscher in Dallas. "They might be able to, but they might not be able to, and they might not be able to do it quickly."
Ensco's rigs in the Gulf typically stay with operators for a while, says a company spokesman, citing a recently renewed 90-day contract one rig has with Amoco (AN:NYSE). Despite sanguine public comments, the Dallas-based driller has yet to sign up operators for two of its premium jackups, a situation thought highly improbably just nine months ago. Ensco's earnings grew 150% in 1997, to $1.66 per share. Earnings for first-quarter 1998, scheduled for release on April 16, according to Baseline, are estimated at 58 cents, up 127% over the year-ago period.
Coastal, a Houston-based integrated company with divisions in exploration, production, refining and marketing, is moving its sights farther afield in the Gulf, following the lead of the major oil companies that were first to set goals pinned to deepwater exploration. After winning leases on several tracts in August's Western Gulf Lease Sale, Coastal was high bidder on eight blocks in deeper waters in the latest Central Gulf Lease Sale, anteing up $6 million for drilling rights. It also put up nearly $4 million in unsuccessful bids for drilling rights on four additional blocks.
In January, Ensco, whose fleet consists of 37 jackup rigs, 10 barge rigs, eight platform rigs and 37 support vessels, announced it had contracted with the Keppel Fels Shipyard in Singapore to build a harsh-environment jackup rig for $130 million as part of its strategy to add drilling capability in deeper water and the international arena. That type rig would be suitable for work in the North Sea or offshore Canada, and could garner a dayrate up to $183,000, according to the Offshore Rig Locator. In comparison, rigs in a similar class to those that Ensco had contracted to Coastal were bringing in dayrates of between $55,000 and $73,000 in the Gulf.
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