CEO sees utilization, pricing power returning in 2H 2019
Diamond Offshore (ticker: DO) produced a net income of $15.9 million for Q2. Diamond’s president and CEO Marc Edwards noted that the company “secured two new contracts” despite the fact that the “market remains challenged.”
The company’s new contracts are for its Ocean Guardian rig, first operating with Azinor Catalyst in the North Sea in August. The second contract is with Cypher Energy in February of 2018. All of Diamond’s sixth generation drillships are engaged in long-term contracts through 2019.
Diamond said it intends to retire five of its rigs during Q3, three of which are moored and one is mobile. The company made the decision based on the size of expected reactivation costs for the four rigs. Since 2014, Diamond has removed 84 of its floating rigs.
Edwards also emphasized that Diamond’s operational efficiency was improving through the use of Pressure Control by the Hour®, a service designed to reduce blowout preventer system downtime. Four of Diamond’s drill-ships operating in the Gulf of Mexico are equipped with the system—its ‘Black-series’ rigs.
The system allowed Diamond to drill one GOM well to 31,000 feet 30% faster than planned.
Diamond also announced that it will offer the sale of senior unsecured notes—the proceeds of which will be used to redeem its outstanding 5.875% senior notes due 2019.
Q2 2017 Earnings Call Q&A
Q: The Pressure Control by the Hour model, can that be applied to some of the additional rigs as well in your portfolio or are you going to stick with the Black series rigs?
Marc Edwards, Diamond Offshore president and CEO: For the moment, we’re going to stick with the Black ships. And one of the reasons that Pressure Control by the Hour has been so successful is because, of course, we sold back the BOPs on those four drillships for $210 million back to the original equipment manufacturer. The reason we could do that, of course, was because effectively the Black ships were all new, the BOPs had only just literally been splashed. So they were in new condition.
And one of the reasons we did that was because we wanted to maximize the penalty, the cost penalty to GE for when the subsea stack was actually not available. In other words, when we have to do an unplanned stack pull, if GE were just losing, let’s say, a maintenance fee for the stack, it wasn’t in our opinion material enough. So, we also wanted them to lose the finance fee on the BOPs as well. So, as a result of that, the total financial penalty is significantly higher.
Now, if we look back at the other fleet, I think in reality, it would be hard for us to sell back the BOPs to GE that were five, 10 years old. The concept doesn’t quite work. So, it was specific to the new additions to our fleet that we are able to go down specifically this path. I think that others in the industry will be looking at, as we move forward, switching the maintenance over to the OEM, but I think few will be able to switch or sell back the BOPs themselves and maximize the financial penalty to GE when their stack goes down. So, that’s specifically why we focused on the new drillships at that time.
Q: If oil prices stay at this level of around close to $50 per barrel, let’s say, in 12 to 18 months’ time, where do you think the active rig count – deepwater rig count – could go? About 135 rigs contracted today, maybe 115 are working, where do you think that could go to?
Marc Edwards: We put a lot of time and effort into establishing where utilization would be over the out-years. We look at what the contracted fleet would possibly be. But I think it’s – I’m not going to put a number on the table at this moment in time. We’re looking at a recovery that is probably the back-end of 2019, in terms of not only utilization ticking back up but also looking at a time when pricing power might return in our space.
One of the things that I alluded to, again, in my prepared remarks is we do have a belief that more rigs will be scrapped as this downturn progresses and that the marginal cost of bringing a rig back into the market will eventually get so high that I think some of the operators will struggle in terms of further investing into an asset that doesn’t have a contract in place from a manner of not just reactivation cost but also the OpEx associated with bringing the rig back into its marketed state, as well as upgrading the rig due to regulatory reasons, and so on and so forth. So we do think the market will bifurcate.
Now, I do know that we’ve seen in the last couple of weeks two or three rigs come back that are cold-stacked, but I suggest that both rigs were cold-stacked for less than two years. One rig had actually been in an ongoing discussion with the eventual client for a good period of time. And the other rig was cold-stacked for less than 18 months. Of course, those rigs, okay, you can bring them back for what are relatively low reactivation costs, but once the rig pass two years, move into three years or four years, that reactivation cost becomes a barrier to reentry and could be quite significant. So we do believe that the market will bifurcate and that those rigs that are active will be re-contracted ahead of those that are cold-stacked.
