Chasing steady revenue, more drillers go deepwater

Wed Mar 25, 2009 9:14pm EDT
By Braden Reddall - Analysis
NEW ORLEANS (Reuters) - Rig contractors are finding the allure of deepwater oil and gas drilling harder to resist in the current slump, given that deepwater's longer lead times and massive budgets promise them smoother income flows.
Experts say drilling to unprecedented depths is part of a natural industry progression as shallower oilfields inevitably dry up. But plans for big spending on deepwater, particularly in Brazil, have concentrated minds among drilling executives.
Matt Ralls, chief executive of Rowan Cos Inc (RDC.N), said its plan to get into deepwater was just good business and not necessarily implying a negative view about the long-term prospects for its existing rigs.
"Our interest in doing it is because we want that diversification in our fleet," said Ralls, who joined Rowan this year, having previously been chief operating officer at GlobalSantaFe, an offshore firm bought by Transocean in 2007.
Ralls, speaking to Reuters on the sidelines of this week's Howard Weil Energy Conference in New Orleans, said the eventual sale of Rowan's equipment manufacturing arm might provide funds for a deepwater acquisition.
"That could be one piece of it," he added.
Pride International Inc (PDE.N) is going a step further, with plans to spin off its Gulf of Mexico fleet of jackup rigs by the middle of this year. While this has been in the works for some time, the move reflects where investors see value.
Right now, investors are worried by steadily falling rates for jackups -- which, as the name suggests, stand on legs on the sea floor and therefore only operate in shallower waters.
Deepwater "floaters" -- high-tech vessels that cost half-a- billion dollars to build -- command higher and steadier rates and companies behind them are now favored by investors.
Shares of Pride and Diamond Offshore Inc (DO.N), a leading deep water driller, trade at forward price-earnings ratios of about seven, compared with less than five for big offshore rivals.
A glance at Brazil shows why deepwater prospects look so strong. The country's energy minister said last week it needed $270 billion in investment over the next decade to develop massive new deepwater oil reserves.
Earlier this month, Goldman Sachs repeated its outperform view on deepwater-focused drillers and raised price targets on Transocean Ltd (RIG.N), the world's largest offshore rig contractor, Noble Corp (NE.N) and Pride.
Goldman was less confident about the outlook for Rowan and Ensco International Inc (ESV.N) with jackup demand so weak and a wave of newbuilds due to be delivered in the next two years.
"Spot demand for international jackups and midwater floaters appears to be nonexistent at almost any price, given that very few rigs that roll off contract are being re-signed," Goldman analysts wrote in a research note.