EUR 850.00 For Business Accounts Only

Morningstar | Noble: Offshore Drillers Remain Challenged by Low Utilization and Pricing

Noble’s fleet of offshore drilling rigs operates in each of the notable offshore drilling markets around the world. Excluding four Middle East stationed jackups, Noble’s fleet is fairly modern and under 10 years of age. This is partially the result of its spin-off of Paragon offshore, which resulted in Paragon inheriting many of the combined company’s older rigs. The firm’s drillship and jackup rigs remain well positioned for any expected recovery in offshore activity; however, Noble carries several semisubmersibles that could be considered disadvantaged. Since the start of the downcycle, the driller has proactively worked to enhance its position. Anchoring rigs to long-tenured contracts with major operators such as Shell, and spinning off marginalized assets has helped, but just as the rising tide boosted performance in the prior decade, market imbalance has debilitated the company’s return profile.With shale producers lowering industry breakevens, investment in offshore projects has weakened and consequently challenged fundamentals for offshore drillers. Certainly, offshore stakeholders have worked toward lowering breakevens, and made considerable progress, but it remains that only a select portfolio of offshore projects are competitive with shale. Long payback periods and high cost of investment continue to plague the prospect of offshore investment. As a result, the number of opportunities has dried up for offshore drillers, and we expect it will be a while before they return. Because day rates are mired by a flood of excess supply, we don’t expect returns to reach value-accretive marks through our midcycle. Further, we expect drillers will fall short of market balancing attrition. This should equate to floater utilization of 66% and jackup utilization of 65%. Moreover, we believe demand will be arrested through 2021 with our “lower for longer” oil price forecast of $60/bbl Brent. Without materially higher investment in offshore projects, we expect driller performance will suffer for many years to come. Therefore, we don't believe drillers offer much upside to investors.