Borr Drilling sees strong case for jack-up market recovery

first_imgAttractive rates ahead? “The combination of accelerating contracting activities, increasing number of tenders and our continued discussions with our customers provide support to our view that jack-up rig utilization levels are expected to continue to improve at an accelerated pace as we move into 2019,” Borr said.Borr feels that the recent drop in oil price might, if continued, slow down the pace of the recovery, however, the driller still finds room for optimism. Borr Drilling says that the oil price drop is not likely to significantly impact the current outstanding tenders which to a large extent have been initiated in an oil price environment that is lower than today.In support of this optimism, the driller cites a recent run of relatively high oil prices (Brent crude went over $80 in 3Q occasionally) and on strong results posted by oil majors, which could lead to growth in offshore drilling spending.“According to Rystad, global oil companies will have a free cash flow in 2018 after investments of US$590 billion, up 100% y/y and the highest level in real terms since 1979. We maintain our view that falling reserve levels, lower project breakeven costs, and strong free cash flow performance will lead to increased investments by our customers,” Borr Drilling said.Article continues below the graphBorr’s rig under construction with expected delivery dates (Source: Bassoe Analytics) Jack-up drilling company Borr Drilling is seeing an increase in jack-up rig utilization, especially in the premium jack-up rig segment, mostly in the Middle East, West Africa, Mexico, and the North Sea.Illustration only. Image source: PixabayThe driller, which currently owns 20 premium jack-ups delivered in 2001 and after, on Wednesday said that the during the third quarter of 2018, global jack-up fleet utilization continued its upward trend driven primarily by increasing utilization of modern jack-up rigs.“Global competitive jack-up rig utilization stood at 75% at the end of September, an increase of one percentage point quarter-on-quarter. Jack-up rigs built after 2010 have experienced a similar increase in competitive utilization which stood at 78% at the end of September 2018, an increase of two percentage points quarter-on-quarter and over five percentage points year-to-date,” Borr Drilling said.Per the driller, in some regions, competitive utilization is above 90%, which is starting to drive pricing higher.“We continue to notice operators’ preference for modern units as evidenced by jack-ups built after the year 2000 receiving approximately 70% of the total backlog awarded year-to-date, and the inclusion of age restrictions in various recent tenders.“Customers’ focus on modern equipment continues, and we see the introduction of age limitations on rigs for participation in several tenders, including large multi-year multi-rig tender processes. This effectively limits a large part of the available jack-up rig fleet from participating in the tenders,” Borr said.Age restriction – No gigs for old rigsThe fact that the operators are increasing in for modern jack-ups, and the fact that older rigs, if not stacked already, will find it hard to compete for future gigs, might boost rates further. If they’re both old and stacked, Borr thinks there’s hardly a chance there may be any economic proposal that could see those rigs back in action.We maintain our view that a significant number of the over 100 jack-up rigs that are more than thirty years old and uncontracted will remain uncompetitive and unlikely to return to the active fleet in the near future, or at all.Borr said: “We maintain our view that a significant number of the over 100 jack-up rigs that are more than thirty years old and uncontracted will remain uncompetitive and unlikely to return to the active fleet in the near future, or at all. In addition, 52 jack-up rigs have been cold stacked for more than two years. Taking into consideration the assumed cost of reactivating these old units, we are of the opinion that these rigs are not economically marketable in current environment.”The driller itself has taken an important role of reducing the global jack-up fleet size. Borr Drilling has recently sold the 1981-built jack-up rig “L1112” ( ex- Ed Holt”), making it the company’s 27th jack-up rig to be divested and retired from the international jack-up rig fleet by Borr and Paragon (bought by Borr) combined since the beginning of 2018.Borr today owns 20 premium jack-up rigs, six standard jack-up rigs (built before 2001) and one semi-submersible. It also has contracts for delivery of nine rigs from yards until the fourth quarter 2020. When all newbuild rigs have been delivered the fleet will consist of 36 rigs, of which 29 premium (27 built after 2011). Higher rig count, higher production? On the number of contracted rigs worldwide, Borr Drilling on Wednesday said there are currently 325 jack-ups under a contract, “up from the trough of 299 in January 2017.”The contracted number of jack-up rigs at the peak in 2014 was 420 units. Apart from the technical specs, age, and the oil price factor, Borr has also selected Saudi Arabia and Mexico examples to prove a case that, in part, an increased rig count leads to increased production, and lower rig count leads to a drop in oil output.The number of land-based and offshore drilling rigs operating in Saudi Arabia is currently 153, which is 14 rigs more than before oil prices collapsed in 2014. Saudi production has in the same period increased by 1 mbd to 10.7m, Borr said.In order to maintain or grow oil production, you need to increase rig activity.“The number of offshore rigs operating in Mexico is currently 19, while the activity levels in 2014 peaked at 52 units. Mexican production has in the same period fallen by 0.8 mbd to 1.7 mbd. These developments illustrate that in order to maintain or grow oil production, you need to increase rig activity. This is partly caused by the fact that the reservoirs become deeper and more complex and need higher drilling intensity.” Tenders accelerating – 75 gigs up for grabs“During the third quarter of 2018, on the back of strong oil prices, operators have continued to display increasing levels of confidence in their future offshore programs,” Borr said.The increased confidence in offshore programs has, Borr says, translated into a noticeable acceleration in tendering activities and direct negotiations across all regions.Citing a report by IHS, the jack-up specialist says there are currently over 75 outstanding jack up tenders equating to a total of 122 rig years on offer, a number that represents an increase of 106% since the beginning of the year. Most of these tenders are for projects starting within the next 12 months.“The combination of accelerating contracting activities, increasing number of tenders and our continued discussions with our customers provide support to our view that jack-up rig utilization levels are expected to continue to improve at an accelerated pace as we move into 2019.” On the back of what it saw as a promising tendering activity, Borr in October 2018 decided to start the activation for an additional four newbuild rigs, on speculation and without a contract secured.Current estimated fixture dayrates for jack-up rigs (Source: Bassoe Analytics)The driller, which has earlier said it won’t be locking its rigs on long-term deals on breakeven rates, now thinks it’ll be able to find employment for the four rigs within the next six months and at attractive dayrates. The company did not say what cash amount constituted an attractive dayrate.Commenting on Wednesday, Borr said: “Supported by the inquiries we today see in the market and the strong focus on modern equipment, we see a good likelihood that we in the next 6 months will be able to contract the 4 rigs currently under activation as well as further units at attractive rates. The increased activity will to a large extent be focused around markets in the Middle East, West Africa, Mexico, and the North Sea.”According to Borr drilling the underlying recovery of the jack-up market is supported by two strong fundamentals: more than 40% of the fleet is more than 30 years old; and shallow water offshore production has significantly lower cash-break even than the marginal shale oil production and also lower cost and shorter pay-backs than deepwater developments.Borr Drilling currently has 14 committed jack-up rigs in total. The company has nine rigs in operations; four in the North Sea, two in the Middle East, two in West Africa and one in South East Asia, and another five premium jack-ups contracted, all of which are expected to start operations between December 2018 and the second quarter of 2019.“During the first half of 2019, we anticipate our operating rig count to be up to 14 rigs and see upside potential to these numbers for the second half of 2019 as we continue to experience increased jack-up tendering activity and customer interest in our fleet,” Borr said.Offshore Energy Today Stafflast_img read more

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