Analysis: 2010 Floater Market Outlook
As 2009 draws to a close and 2010 approaches, we are taking a look at the year behind us in the rig market and providing thoughts and forecasts for the offshore and onshore rig market in the year ahead. This is the fourth installment in a series of articles which will review 2009 and preview 2010 for the jackup, floater and land rig markets.
With oil prices recently stabilizing in the $70-$80 range and some E&P spending budgets likely to modestly rise from 2009 levels next year, most offshore rig markets around the globe appear likely to either experience stabilization or stage some sort of recovery in 2010. As discussed in further detail below, we forecast the worldwide floating rig count to remain relatively flat next year as increases in the deepwater and ultra-deepwater fleets are expected to be offset by decreases in the midwater fleet. However, the floater fleet faces an approaching pocket of availability, and the fate of the floaters that become available throughout 2010 and 2011 should provide a good barometer for the health of the market post the commodity price collapse. In the sections below, we preview what 2010 has in store for the floating rig market.
Throughout this report, we refer to midwater, deepwater and ultra-deepwater floaters. To clarify, we define midwater floaters as semisubmersibles and drillships capable of operating in water depths less than 4,000 feet, deepwater as semisubmersibles and drillships with water depths of 4,000 feet to 6,999 feet and ultra-deepwater as those units with a water depth capability of 7,000 feet or more.
Context for the 2010 Floater Market
Circumstances for the floating rig market as 2010 begins are significantly different than at the beginning of 2008 and 2009. When the ball drops and 2010 is rung in, the floating rig fleet will be about 10% larger than a year prior. By the time the current newbuild cycle has wound down and all rigs on order are delivered over the next several years, the floating rig fleet will stand near 310 units - about double its size at the beginning of this decade. Although supply growth is the most obvious change in the floating rig market, there are about twice as many cold stacked and ready stacked floaters today as there were a year ago. Average earned dayrates have marched higher with the commencement of contracts signed near the peak of the market, and floating rig demand measured by rig count is also higher than year ago levels, bolstered by the 23 floaters delivered in 2009.
Considering the industry-wide downturn that unfolded over the last 18 months or so, the floater market has held up well so far due to a significant contract backlog. In the wake of the pull back, the leading edge dayrate bar has already been lowered significantly for midwater and deepwater assets, but the handful of recent ultra-deepwater fixtures have held up better due to the continued lack of near-term availability (more details can be found in our 2009 Floater Market Review).
As shown below, term contracts already locked in will drive the proceeds generated by floating rig contracts higher in both 2010 and 2011 even if no additional contracts are signed. Ultra-deepwater contracts are largely responsible for the 2010-2011 backlog, and E&P capex has increasingly targeted ultra-deepwater rigs as strong crude oil prices and technological advances have improved ultra-deepwater economics over the last 5-10 years. Ultra-deepwater spending accounted for approximately 37% of floater spending in 2009, up from 29% in 2008. Looking forward, ultra-deepwater constitutes 50% of the 2010 floater contract backlog and just over 60% of 2011 backlog. Worth monitoring over the next several years is the extent to which the increasing commitment to ultra-deepwater rigs will impact demand for 4th/5th generation deepwater semis rolling off contract.
While the offshore rig market today is fundamentally different in many ways as compared to earlier in the decade, a look in the rearview mirror provides context that cannot be overlooked as we move into the new year. The jackup market sustained a much more devastating year statistically than floaters in 2009 (see our 2009 Jackup Market Review), however trends in the floater market have historically lagged those in the jackup market due to differences in contract duration, lead time between fixture and start date and other factors. As the chart below shows, plotting total utilization for jackups versus floaters reveals a significant floater trend lag in the last downturn in the 2001/2002 timeframe. Prior to the 2001/2002 downturn, jackup utilization peaked five months ahead of the floater market. Following the downturn, the jackup market experienced a more V-shaped bottom/recovery while the floater market experienced a more U-shaped bottom/recovery, reaching its lowest utilization level almost full year after the jackup market.
Partially due to the lack of near-term availability, there have been very few deepwater and ultra-deepwater floater contracts awarded in 2H2009. In fact, a waiting game between operators and contractors has developed as operators look towards the chunk of deepwater and ultra-deepwater contract expirations in 2011. Operators seem willing to wait for the availability to pressure dayrates further before fixing long term contracts, while contractors remain reluctant to succumb to dayrate reductions in order to secure backlog.
The charts below demonstrate the number of floaters becoming available (comprised of both newbuild deliveries and expirations of existing contracts) each quarter over the next two years. It is worth noting that this analysis does not assume any new contract awards or account for other potential mitigating factors like delays or cancellations for newbuilds or cold stacking of units rolling off contract. Looking at availability in 2010, the midwater market faces the biggest supply challenge and will likely see more utilization pressure than the deepwater markets. In fact, approximately 40% of the currently contracted midwater fleet rolls of contract in 2010, compared to only 24% for the deepwater fleet and 12% for the ultra-deepwater fleet. However, moving into 2011, another 26% of the current deepwater rig count will be available and 48% of the contracted ultra-deepwater fleet will be available. Much of the ultra-deepwater availability comes in 2H2011 as 23 ultra-deepwater rigs are scheduled to become available during those two quarters alone.
While it is still to early to say with certainty how this availability will be absorbed and what it will ultimately means for dayrates, the lead time between floater fixture dates and start dates will likely continue to decrease for floater contracts awarded over the next year or two as operators stall and contractors resist caving in to lower dayrates. In fact, this trend has already started to play out in the numbers as the average lead time between contract award date and contract start date for 2009 floater fixtures was down about 50% from 2008 levels. Furthermore, the number of floater fixtures signed in 2009 was down materially from 2008 levels. The waiting game and lack of near-term availability will likely result in a somewhat quiet 1H2010 for deepwater/ultra-deepwater datapoints and contracting activity with activity potentially picking up towards the back half of the year.
Although anxiety levels are likely to rise in the floater industry as 2011 approaches, it is important to note that crude oil prices currently stand above the average price for any year except 2008 - a fact which should be supportive of the floater market going forward if the price of crude holds or improves. Interestingly, over half of the contracted floaters on the orderbook today (most of which are ultra-deepwater units) were ordered when crude oil prices were below the $80 mark. Delays or cancellations of uncontracted newbuilds on order could help mitigate the supply situation as well.
On the flip side, many of the ultra-deepwater rigs delivered during this decade will pay back construction costs in full as their contracts generate dayrate over the next several years - a factor which could further pressure dayrates as these rigs become available. Furthermore, the number of days required to drill a 'pre-salt' well has declined over the past 2-3 years. The first wells drilled in the GOM and Brazil took 180-240 days on average. Now these wells are being drilled in 90-120 days and further efficiencies could be realized in the new decade. In general, only rigs delivered after 1995 are capable of the reduced drilling time, but with over 70 deepwater and ultra-deepwater rigs on order, this trend's impact on rig demand will likely begin to play out more fully over the next several years.
In the table below, we provide details on select floating rigs with availability in 2010 for each floater category.
Petrobras remains the principal wildcard in the floater poker game. Petrobras is by far the largest deep and ultra-deepwater rig operator in the world today, and in addition to the 43 floating rigs Petrobras has currently deployed, the NOC is supporting the construction of a further 21 floaters on the RigLogix orderbook. While the NOC plans to satiate its incremental floater demand primarily through newbuilds and local content in the new decade, it is possible that financing difficulties for contractors building rigs, infrastructure challenges or the delay of newbuild deliveries could force Petrobras to procure incremental rigs from existing supply over the next several years. If a price war develops in the 2011-2012 time frame, Petrobras may look to lock up available supply for long terms at lower dayrates - a strategy the NOC has exploited in the past.
In late-2009, the Brazilian NOC issued tenders to shipyards for the construction of up to nine rigs to be built and owned by Petrobras. Additionally, requirements for up to 19 rigs were issued to drilling contractors, with deliveries to be staggered from 2014 to 2017. The tenders require that the rigs be constructed in Brazil and meet local content requirements.
2010 RigOutlook for the Floater Fleet
Although the floater market faces increasing uncertainty given the supply poised to become available over the next couple of years, we expect the global floater rig count to float on near current levels next year. According to proprietary forecasts prepared by our RigOutlook modeling team, worldwide floater demand is expected to average several rigs above current levels in 2010, at 202 units for the year. Specifically, we believe the deepwater/ultra-deepwater rig count will continue to rise (2010 average forecast to be about 20% above 2009 average), offsetting expected decreases for the midwater fleet (2010 average forecast to be 12% below 2009 average). Our team's predictive model for the floating rig market, has proven to be highly accurate historically. In fact, over the past three years, the worldwide deepwater forecast accuracy is within 13% of actual demand and dayrates. Meanwhile, although leading edge dayrates have decreased as discussed in our 2009 Floater Market Review and may face additional pressure given the availability of floaters over the next 24 months, average dayrates earned by the global floater fleet are forecast to stay roughly in line with current levels next year.
It is important to note that in the graph above, the <4,000 ft floater category includes North Sea rigs, particularly those deployed in Norway. These harsh environment rigs typically have higher/more stable utilization and help to support the midwater rig count in 2010 in the analysis above.
Drawn from the most recent edition of the RigOutlook Deepwater Demand report, the charts below provide our expectations for contracted floating rig counts for 2010 for several key regional markets. Interestingly, the deepwater/ultra-deepwater rig count in the U.S. Gulf is expected to grow by about 17% next year as contracts already in place commence. Meanwhile, the floater rig count in Brazil is forecast to expand to 62 rigs by the end of 2010 compared to 49 rigs today. Alternatively, the deepwater/ultra-deepwater floating rig count in West Africa is forecast to fall a couple of rigs to end 2010 at 21 units. Not shown in the charts below, the average earned global midwater floater dayrate is forecast to decline modestly over the course of the year and average in the high-$290s, while the average earned global ultra-deepwater dayrate is forecast to rise modestly and average in the mid-$470s for the year.
When reviewing these graphs, please note that the blue line shows the actual number of rigs contracted. For dates in the past, the red line indicates the demand that was modeled using the RigOutlook mathematical model. For our 2010 forecast, the black line indicates a "bullish case" level of demand that might result in the event of oil shortages or supply interruptions that could drive demand above expectations. The green line presents a "bearish case" level of demand that could result if the economic recovery falls short of expectations. The orange line indicates the level of demand that we expect to see over the next year.