Offshore Jack Ups: A resurgent dawn or the fading sunset?

Shallow water Oil & Gas / Marine is where I have spent most of my adult life working. I like this space & hoped to retire from it one day, after having made a modest nest egg. Oilfield, after all, WAS one of the few blue-collar jobs out there that still let you do that…. But notice the emphasis on WAS…The last few years have seen, not just the jobs disappear, the lucky few that still had them, saw their paychecks cut back by half or more. One day in Nov 2014, the worlds chugging along fine & next day its mayhem. How did we come to this? 

A lot of inks been spilled by a lot of experts (who are very good at rationalizing after the fact), as to why it happened. None of these geniuses said anything before the apocalypse or could predict this outcome. Many Offshore drillers threw caution to the winds, discarded time-tested strategies to preserve cash in good times to cherry-pick competition in the bad. Choosing instead to wallow in debt chasing shiny new iron for exotic Deepwater exploration in far corners of the world, while the shale guys were changing the O&G landscape under their very feet (no pun intended). 

I’m not that well informed or that old in the industry to really hold a candle to these “experts”. So this is not some scholarly article based on some fancy esoteric data. I’m just a mildly curious average Joe, trying to make sense of the world around him. I, much like many others, who are too busy trying to keep the bit turning to the right; are just interested to know… do we have a future in this industry, are things ever going to get better & if so when.  This is my story of that pursuit & I hope to share it with you.

Do I have these answers; not really, but I'm a little less ignorant after this exercise. Specifically, there was one conspicuous move that stood out in the doom & gloom of recent times. There is at least one company out there, who is betting that Shallow water offshore drilling has a future & a good one at that. Not just that, He’s putting his money where his mouth is…about 630 Million worth, so I wonder, which fits better here, “look before you leap” or “fortune favor’s the BOLD”, I don’t know & perhaps time will tell. 

Whatever their other faults maybe…. Lack of BOLDNESS is not one of them…  “Borr drilling”, (although I’d like to call them BOLD Drilling), in a mere 16 months, came from nowhere to become the biggest Jackup rig player in the world[9]. I was intrigued, who wouldn’t be? How do they see the offshore drilling world so differently & more importantly, what am I missing?  

But before we go there let’s examine for a minute why did the offshore Drilling contractors suffer as much as they did during the downturn.  Perhaps a good way to examine that question is by Porter’s five forces framework, in his seminal work on Competitive Advantage & Strategy, which describes the interplay of the competitive forces that shape any industry, as illustrated below 

Here’s what we do know about these forces in Offshore Drilling…

The threat of Substitutes: Within the hydrocarbon space, Shale is fighting for & getting the upstream dollars, at the expense of offshore. It sees faster ROIs, lesser project risk, much faster mobilization. In the broader scheme of things “Alternative energy", electric cars; autonomous mobility will fundamentally change the energy landscape. But that is a whole different discussion; so I’ll just restrict this just to Shale. In the long run, "Shale" will probably be a big headwind to Offshore O&G spending (unless the unconventional plays start drying up fast). But to their credit Shale has found ways to claw up the learning curve & bring their breakeven costs much lower. If Offshore has to survive & thrive, they will need to find ways to be competitive against Shale[10]

Bargaining Power of Operators (Buyers): Extremely high; they have always enjoyed the upper hand even in established relationships. There are some efforts to get to "Performance-based Contracts"; flexible day rates which better aligns the interests of Operators / Contractors & tries to find a "Win-Win" solution instead of the Zero-sum game that is typically played out.  Right now at the bottom of the industry cycle, the Operators hold even greater sway, as most contractors are desperate to get contracts.

Bargaining Powers of Suppliers: Already consolidated to a few big guys like NOV, SLB etc, there is limited wriggle room. 

The threat of new entrants: Well Borr has already played that card. I doubt there is enough appetite in the market to spawn another contender.

Industry Rivalry: It is therefore not surprising that there is extreme Industry Rivalry, given the abundance of Drilling rigs & Drilling Contractors. The offshore drilling contractors need consolidation & a large number of rigs need to be scrapped to get back to 85 % utilization. More on this later.

The arrival of “Shale” & the “market share” war it triggered, caused a tectonic shift in market dynamics. Squeezed in from all sides & driven by this toxic Macro environment, something had to give & it did. Bankruptcies came thick & fast. 

Too many players are fighting for scraps… this hardly qualifies as an attractive investible space. Wiley investors like Warren Buffet invest in companies/industries that are able to build a moat around their profitability by taming these very competitive forces. Would Offshore drilling be such a space… maybe not, just yet! But things are changing & one man’s challenge is another’s opportunity..…

The Borr Story: How do they see the glass half full?

“Opportunity” often comes cloaked in “chaos”. The brilliance of Borr lies in recognizing & boldly seizing the opportunity when others were fearful. What is remarkable is the speed & alacrity with which they have disrupted this space. This speaks to how they see the world shaping up in the post shale world & their execution ability… something that will be put to the test as they try to morph from an "acquisition play" to an Operational player.

They are trying to build that moat… scrap old rigs, control the market for newer more capable rig & follow something of a “Differentiated Product Strategy”.

The Company Presentation on Borr’s website offers some insights into their projections for the future.

While getting to historical rates might be a challenge, but given their low acquisition cost, they will survive when others struggle & thrive when others survive. But this is easier said than done, as significant impediments exist that can stifle growth. The most significant being oversupply.

Revenue Sensitivity with Day rates & Capex. 

Cash Flow Sensitivity with Day rates & Capex  

Oversupply: There are just too many rigs

There is a large oversupply of Jackups in the market, of these 260 are pre-1990 & face obsolescence[11]. Others have called them zombie rigs & probably will not play a  significant role in developed markets with oil majors, but may stifle demand for newer rigs in some NOC markets by playing the low-cost card to those that favor this approach over rig performance & capabilities. The cold stacked rigs will find it almost impossible to come back to the market, especially if their vessel certificates have lapsed & the grandfathering is no longer possible.

Contracted Vs Available Rigs 

The worldwide utilization rate for Jackups is just 57% (but climbs to 63% when adjusted for zombie rigs) 

The scrapping of the rigs to reach 85 % utilization is seen as a precursor to increased day rates. Two scenarios have been presented in an informative article [1]

Minimal Scrapping; unrealistic demand increase required to get to 85 % utilization

Moderate Scrapping; 32 % demand increase required to get to 85 % utilization

New build Overhang[2]: In addition to the old rigs, there is a large dormant oversupply of new builds that still exists, admitted not all of them may survive the gauntlet, as operators are reluctant to hire a rig without an operational track-record unless the rig is owned by an established drilling contractor[11], but as market rates recover; serious actors (non-speculators) will take ownership & try to put them to work, this will keep day rates range bound, unlike the old iron; some of these will qualify as high spec/premium offerings  & offer stiffer competition in tenders 

Jackup Battlegrounds: 

The Middle East & Asia Pacific are some of the markets that interest me the most & have a large population of Jackups, these probably will be Jackup battlegrounds of the future. Here's a review of who’s where & how they are positioning. (Scroll to the end to see a region-wise full list of rigs). I have left out the North Sea & North American markets. These are important Jackup markets, but since they are very territorial in the crew they allow to work in their space; they hold little interest for me, at this time.

The Middle East & Caspian[3]

Working Rigs

Abu Dhabi’s National Drilling Company (NDC) is a big player in this market, has newer rigs & established contractual positions. ARO Drilling, a joint venture between Rowan and Saudi Aramco, is an emerging leader that is poised become dominant in the Saudi market with their 17 rig JV. [12]

Another important player is Shelf Drilling, it has a significant presence with old rigs, something which will increasingly come under pressure from the likes of Borr, who will be trying to gain a foothold in this market.  It’ll come down to how strong is your relationship with the client. 

Everyone will be trying to secure contracts, which in turn will depend on the quality of assets one holds. With significant moves by ARO/ Rowan already underway.

Warm Stacked

There are a significant number of warm stacked rigs of various specs & vintage for the taking, acting as a damper on day rates. Old rigs continue to find jobs; perhaps the operator is not as concerned with rig capabilities, as he is with day rates. This is increasingly evident in some Middle East & Indian (west coast) scenario with depleted reservoirs where stimulation & workovers form the bulk of rig tasking.  In fact, many of the old rigs are still working, and some others are kept in ready-to-work state. Interestingly, there are just a few cold-stacked jack-ups in the region. 

With so many warm stacked rigs its unlikely that the cold stacked rigs will get a new lease on life. As a result, it is likely; all these cold-stacked rigs are scrapping candidates, especially with the likes of Borr knocking on the door. Acquisition of Paragon was perhaps driven as much by the desire to take charge & hasten the demise of these old rigs, as perhaps finding operational synergies. 

Asia Pacific& India[4]

India is a bit of an outlier. It is a very cost sensitive market & has seen some abysmal day rates in recent contracts. The local players are a dominant force in shaping the contractual economics & I think it will become a place where noncompetitive rigs from other regions come for what might be their final contract or two before they are put to pasture. The fact that they will mostly end up doing workovers to some extent masks their shortcomings. Although there was some talk by ONGC seeking only new(er) rigs for future contracts Among big international companies, Shelf Drilling has a significant presence, albeit with old, aging rigs. Unless local day rates improve significantly, I don’t see multinationals getting too interested in India. 

In the Far East, the biggest position in the region is taken by COSL. China National Petroleum Offshore Engineering and SINOPEC also have a significant presence in the jack-up market. This is understandable given the enormous output from Chinese shipyards in recent years and China's demand for energy. COSL Pan Pacific is a serious contender with new rigs & good operational track record. The number of working rigs is significant, but so is the number of warm stacked ones. 

The Asian-Pacific segment looks oversupplied right now. The fact that this is the most prolific rig building area only intensifies the problem. There are plenty of ready-to-work rigs of all kinds: standard, premium, and high-spec. In this light, cold-stacked rigs are way down the waiting line, and it will be hard for them to enter the market anytime soon.

So what does it all mean?

As I see it, from the ruins of the current marketplace, the competitive forces will profoundly reshape the industry structure. Offshore Drilling Contractors will consolidate to a few good players with capable rigs & "Differentiated product strategies" who will be the service provider of choice for the multinational Operators. There will be a few remnants of the “Cost Leadership Strategy” with poorer rigs, who will primarily be limited to a few local NOCs on the market fringes.

So is the worst behind us, can we expect the things to get better?  I can’t say for sure but I do know that It's not a question of if, it’s a question of when. The world's population hasn't come down by half and the energy consumption isn't going to come down either. If anything, one of the surest indicators of prosperity & development is per capita energy consumption. The vast masses of India and China are only going to consume more energy.  Yes, they plan to leapfrog to greener, renewable resources & that's not such a bad thing (in my personal view), but for the foreseeable future  (the next 10 /15 years or so) I don't see that happening at a scale needed to meet the world’s energy needs. As the renewables scale up they will run into their own supply chain bottlenecks of Lithium, cobalt, recycling etc & that’s when the shakedown with the hydrocarbon economy will really take place. 

The Rig oversupply concerns do exist & unless aggressive rig scrapping occurs, this will continue to be the determinant of day rates going forward. Having said that, I feel the oversupply situation will resolve sooner than later, the owners of these zombie rigs are hemorrhaging cash and they can’t do this forever. [8]

My concern is more about US shale play.  Availability of easy money and unencumbered greed is surely going to keep tipping the apple cart. There are huge shale reserves in Canada, Argentina & in some other jurisdictions. The financial & oil services ecosystem is perhaps not as well developed as the American space, but these can be ramped up relatively quickly. So Shale isn't going anywhere, the question is, in the era of contracting demand, will shale & offshore find a means to coexist or are we destined to repeat the mistakes of past in this endless cycle of drill--boom-bust. I’m not so sure about that.

As rigs get scrapped, some crew will get canned as well, but for the most part, this has already played out. Some old-timers who've been around a while & have something saved away may decide it's not worth the trouble anymore, much like the old rigs, they are going to fade away. For the ones still left standing, it’s going to be a tough 2018, indications are 2019 would be better. So if you're one of the guys who's lost a job or is going to …hang in there…salvation is close at hand, but the real question is would you get a spot on the Ark, that's the kicker because there isn't room for everyone, at least not just yet...

Disclaimer: I’m one of the guys on the working end of the tool. I believe we provide the biggest “Value” in the “Value chain” that keeps the party going for everyone. I’m not the guy in pinstripe suit; I’m just a hand. I don't have access to fancy databases & I wrote it like I saw it. I have given due credit in references from whom I borrowed generously Many thanks for their efforts. I'd love to hear what you think, please leave your comments (good or bad). The real value of this modest effort is in the power of the conversation it drives. I didn’t mean to offend anyone, if I have, please chalk it down my naiveté as a writer.  Thx Ravinder Dhami

New Build Inventory of Shipyards[5]

Source InfieldRigs

The Middle East & Caspian Rigs: Working Rigs[6]

The Middle East & Caspian Rigs: Warm Stacked:

Cold Stacked

Asia Pacific & India: Working[7]

Warm Stacked

Cold Stacked: 

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[1]https://www.bassoe.no/offshore-rig-market-to-reach-85-utilization-again/news/61/

[2]https://seekingalpha.com/article/4158521-jack-ups-deep-dive-eastern-europe-mediterranean-newbuilds-conclusion

[3]https://seekingalpha.com/article/4157888-jack-ups-deep-dive-middle-east-and-caspian-sea-segment

[4]https://seekingalpha.com/article/4158520-jack-ups-deep-dive-asia-pacific-segment

[5]https://seekingalpha.com/article/4158521-jack-ups-deep-dive-eastern-europe-mediterranean-newbuilds-conclusion

[6]https://seekingalpha.com/article/4157888-jack-ups-deep-dive-middle-east-and-caspian-sea-segment

[7]https://seekingalpha.com/article/4158520-jack-ups-deep-dive-asia-pacific-segme

[8] (https://www.bassoe.no/owners-of-old-jackup-rigs-realize-their-gamble-isn-t-paying-off/news/74/)

[9] https://www.rystadenergy.com/newsevents/news/press-releases/borr-drilling/

[10] https://www.rystadenergy.com/newsevents/news/newsletters/OfsArchive/ofs-february-2017/

[11] https://www.rystadenergy.com/newsevents/news/newsletters/OfsArchive/ofs-july-2017/

[12] https://www.bassoe.no/aro-drilling-takes-control-of-the-saudi-arabian-offshore-rig-market/news/73/