ENSCO Updates Brazilian Rig Fleet Status

London-based offshore drilling contractor ENSCO Plc reported Thursday that all 10 of its rigs operating in Brazil have term contracts with no early termination of termination for convenience provisions. This includes the recent contract signed with Petrobras for ENSCO 6000 (mid-water semisub) that is contracted through April 2014 as previously announced in Ensco's Nov. 1 third quarter earnings.

The company is also in advanced negotiations with a customer for multi-year contracts for the ENSCO 6001 (mid-water semisub) and ENSCO 6002 (DW semisub), which are up for renewal in June 2013 and July 2013 respectively.

Ensco's Brazilian market update occurred the same day a Bloomberg report noted that stocks for Ensco and its offshore drilling peers underperformed on news that contracts for eight to 10 mid-water and low-end deepwater rigs were at risk of expiration or early termination.

However, the concerns regarding claims that Petrobras will trim contracts for mid-water and low-end deepwater rigs are overblown, Barclays Capital reported Friday.

"We believe the market is aware Petrobras intends to trim mid-water units and, as a result, the negative read from these claims is that Petrobras is now weighing dismissal of deepwater units as well," said Barclays analyst James C. West in a statement. "We disagree and see limited scope for these levels of reductions. Further we think any deepwater culling will be more than offset by new units contracted."

Currently, 75 floating rigs are working in Brazil, including 65 under contract to Petrobras. Based on Petrobras' production targets we think the company will need up to 50 additional floaters over the next decade, West noted.

Domestic shipyard and rig construction challenges remain in Brazil and will likely translate into additional delays for the 28 deepwater units to be built in Brazil, West said.

"We expect talent, capital and technological challenges to persist and think competing industrial goals and large-scale coming events (including the Olympics and World Cup) will act to strain the workforce and bureaucratic institutions further."

As a result, Brazil will seek to maintain its floating rig fleet within the constraint of rising equipment standards and continue to come to market for additional "bridge rigs". While the numerous early termination or day rate revision of contracts following the Macondo spill are likely fresh in investors' minds, Barclays believes Macondo-related force majeures reflect the extraordinary events related to the spill.

Under the extremely unlikely worst case scenario, Diamond Offshore has the most downside from rigs going idle in Brazil; idling all nine units working for Petrobras in Brazil at full cost would adversely impact earnings per share by approximately $1.45/quarter, compared to impacts of approximately $.75 for Ensco, $.55 for Transocean and $.50 for Noble Drilling.

The mid-water market remains relatively slack with utilization in the high 70 percent rage; however, Barclays believes these units would be absorbed in strengthening mid-water and lower-end deepwater markets, including the North Sea, Southeast Asia and Mexico.

TPH Energy Research noted that early contract terminations seem unlikely; however, allowing contracts to roll wouldn't be a surprise as Petrobras focuses more on Brazil's offshore pre-salt play.


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