The U.S. Gulf of Mexico drillship market is currently in quite an enviable position. Figure 1 shows that as of mid-July, marketed utilization of the 25-rig fleet stood at 96%, with 24 units either working or committed to begin contracts in the next few months. And, with it rumored that the lone stacked unit may be cold stacked shortly if work is not secured, the fleet could soon find itself with 100% utilization. By comparison, just one year ago in July 2018, contracted utilization stood at just 76%.
This scenario has been predicted by RigLogix, although the timing is actually a bit ahead of the forecast schedule. On the supply side, there has been a healthy amount of movement in and out of the region, and that will continue to be the case for the remainder of 2019. There are currently four units in the region that will depart for contracts in Central and South America shortly. One of the four was already overseas but came to a Brownsville shipyard for some minor repairs. Conversely, there is one drillship currently working off Mexico that will return to the U.S. side of the Gulf for a contract starting in September. Some rumors suggest that a few additional units could be mobilized to the region, but most rig owners say they are mindful of not oversupplying the fleet, so any new units brought in will likely be done with contract in hand.
As for fleet availability and considering those units anticipated to receive contract extensions (that have not yet been reported), RigLogix shows that there are three units coming free in 2019 and six in 2020, although four of the latter number do not take place until the second half of the year. However, given anecdotal evidence that there are several planned drilling programs, Westwood expects all of these units to secure further work through either new charters or extensions to existing contracts.
One sign of how strong demand is can be illustrated by one rig owner that has multiple rigs working under long-term, multi-year contracts for a single operator. An inquiry was made as to whether there was available time on the schedule, and the answer was reportedly no. Generally, an operator that has more than one rig operating under contracts that do not end for 5-6 years will have some available time that will allow the rig owner to look for sublet opportunities during the downtime, but apparently not in this case.
At present, Shell, Chevron and BP have over 50% of the contracted fleet under their control. Shell has six drillships under long-term contracts, while Chevron accounts for four units. BP has three units currently contracted, with a fourth coming in January 2020. A couple of those rigs could be released at the end of their current terms, which could provide other operators looking for rigs some options. As for other operators, those with multiple units contracted at the moment include Anadarko, Hess and Fieldwood Energy. Looking ahead, the bulk of activity will continue to come from the three majors mentioned above, but other operators like LLOG Exploration, newcomer Beacon Offshore and others also have drilling coming up that will require one or more rigs for fairly long-term programs. The question will be how many rigs will they have to choose from? At the moment, it does not appear that it will be many.
In the end, while the supply numbers will move up and down, strong demand will continue, and utilization will remain in the 95-100% range, that is assuming rig owners do not shoot themselves in the foot by mobilizing a large number of rigs to the region on speculation, something that has occurred a time or two in the past.
As is always the case when utilization goes up or down, there is a lag period before day rates catch up, and this time is no exception. The most recent fixtures, all done in March-May, were in the $165,000-175,000 range, which was a decided step change up from the $125,000-140,000 range the market had experienced for some time. However, the current range was established from just four fixtures, and although many rigs here are still operating under the older, high rates established several years ago, there are still plenty of opportunities forthcoming for new high fixtures to be established, and indications are that said increases are on the way sooner rather than later. Westwood expects new contracts in the $185-190,000 range to be concluded shortly, with $200,000 likely coming later this year or in the first half of 2020. Westwood further expect a second 20K BOP equipped contract to be signed this year at a rate substantially higher than the ~$450,000 fixed in 2018.
Generally, the consensus seems to be that many operators have seen the writing on the walls as it pertains to day rates trending up, and that they are simply trying to secure the best deals they can. However, some operators that were able to secure floaters at much lower rates, are said to be a bit surprised at the numbers being quoted now. Regardless of that aspect, it would appear most are somewhat secure with their oil price outlook as that ultimately drives drilling decisions.
Terry Childs, Head of RigLogix
[email protected] or +1 (713) 929 3324