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Oil’s exploration comeback means drillers could hit cash

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Working on offshore oil rigs, miles from anywhere, can be a lonely business. Onshore executives at specialist drilling companies might have suffered similar pangs. Big oil companies have not had much need for deepwater rigs as exploration budgets tightened. Demand for the largest drillships has hardly changed in the past decade, meanwhile supply has collapsed as much as 40 per cent.

Hence the industry’s keenness to consolidate. Noble Corporation this week announced it would acquire its US rival Diamond Offshore in a cash and shares deal worth about$1.6bn. Diamond relisted itself in 2022 after exiting bankruptcy with a reduced debt load. The pro forma Noble, along with leading deepwater rig operator Transocean, will dominate the sector with a combined third of the global supply of this equipment.

This deal works out for both sides, highlighting the value available in this market. Noble will pay the equivalent of $350mn per Diamond rig, says Bård Rosef at Pareto. It would pay nearly double that for a brand new deepwater drillship. Noble’s planned pre-tax annual cost cuts of $100mn will easily cover the smallish premium of 11 per cent paid on Friday’s closing price.

Indeed, Noble has promised a 25 per cent lift to its dividend on the expectation of having more free cash flow once the deal closes. Diamond shareholders should receive a price near the highs since it relisted. Shares of both buyer and seller rose on the day.

Line chart of Utilisation rate, per cent, all generations of rigs showing Supply cuts have lifted  the rig market

This optimism is warranted. With fewer deepwater vessels around, day rates (rentals) have climbed to $450,000 daily, on Pareto’s data. Take away the operating expenses and drillers can clear around $300,000 per day. If an oil company needs a deepwater rig in the Gulf of Mexico, Brazil, or new exploration hotspot Namibia it has to deal with these higher costs.

No surprise that French oil company TotalEnergies recently chose to hedge these rising costs. It bought 75 per cent of the Tungsten Explorer drillship from Vantage Drilling in February for $199mn. Oil companies for the most part prefer to lease not own rigs.

There are other drilling operators that might attract takeover attention, or seek consolidation deals. Companies with appropriate fleets include the fourth largest deepwater driller US-listed Seadrill and Norway’s Eldorado.

Business may have improved for these deepwater drillers, but only after much belt tightening over many years. As the sector’s fortunes start to pick up, companies will find it is cheaper to buy extra capacity than build it.

alan.livsey@ft.com

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