Diamond Offshore spots signs of ‘strong and lasting upcycle’ as its rigs land new jobs in UK

Offshore drilling contractor Diamond Offshore Drilling is optimistic about the future after winning more assignments for its rig fleet in the UK during the third quarter of 2023. With investments in offshore upstream oil and gas projects on the rise along with rig demand, the rig owner has secured higher day rates and anticipates further improvements in the offshore drilling market, bringing new work opportunities to its fleet.

With the quarterly results season upon us, many oil and gas players – including Shell, BP, Chevron, ExxonMobil, Eni, and TotalEnergies – have disclosed their quarterly results while offshore drilling giants continue to provide updated fleet status reports and glimpses into their performance over 3Q 2023. After two offshore drilling giants, Transocean and Noble, revealed their quarterly results and fleet status reports, Valaris also issued an updated fleet status report, confirming a batch of new contracts and extensions spanning multiple geographies.

While Noble got its hands on new drillship and jack-up deals, Transocean secured drillship assignments and Valaris found more work for four floaters and five jack-ups. Transocean’s contract backlog went up for the sixth consecutive quarter to $9.4 billion at the end of 3Q 2023, Noble’s total backlog rose to $4.7 billion and Valaris’ backlog increased to $3.2 billion.

Diamond Offshore disclosed contracts and extensions for two semi-submersible rigs in the UK in its latest fleet status report on November 7, 2023. As a result, the company got $240 million in additional awards, bringing the total backlog to $1.64 billion. The rig owner’s average day rate in 3Q 2023 was $307,000 per day, compared to $299,000 per day in 2Q 2023. The firm’s total fleet utilization was 57% in 3Q 2023 versus 70% in 2Q 2023 while the revenue efficiency was 94.9%, compared to 95.8% in 2Q 2023.

Bernie Wolford, Jr., President and Chief Executive Officer of Diamond Offshore, commented: “Our business continues to benefit from improving energy industry fundamentals. As we enter the fourth quarter, we see a continuation of positive indicators of a strong and lasting upcycle, including growing rig demand, increased investment in offshore upstream projects, and shrinking rig availability. Particularly encouraging is the increased demand we are seeing in the UK sector.

“Recently, we signed a thirty-five well P&A campaign for the Ocean Patriot, representing approximately three years of firm work estimated to commence in early 2025 with up to seventeen additional P&A wells underpriced options that would add a fourth year of duration. In addition, our customer in the UK exercised its second and third options for the Ocean GreatWhite that extends its contracted term to August 2024. We now have $1.6 billion of backlog with notable day-rate improvement, as we transition to new contracts.

“As previously announced, we completed a refinancing transaction that resulted in the issuance of $550 million of senior secured second lien notes at a meaningfully lower interest rate and later maturity date than our previously outstanding debt as well as an amended $300 million revolving credit facility. Our balance sheet is now stronger with an improved liquidity position, more financial and operational flexibility, and with debt maturities extended to 2030.”

According to Diamond Offshore, a 35-well P&A contract with TAQA Bratani Limited (TAQA) was secured in the UK with an estimated duration of three years for the Ocean Patriot semi-submersible rig. The deal is slated to start in January 2025 and entails up to an additional 17 priced option wells with an estimated duration of 12 months. The 1983-built Ocean Patriot rig is of Bingo 3000 design. This rig can operate in a water depth of up to 3,000 ft and its maximum drilling depth is 20,000 ft. The semi-sub is currently on a two-well contract with Repsol in the UK North Sea, which began in early October and is expected to run until late November 2023.

During 3Q 2023, BP exercised the second and third priced option wells for the Ocean GreatWhite semi-sub rig in the UK with an estimated duration of 60 days each. The option wells will be completed in direct continuation of the existing term and the rig is now expected to remain under contract until at least August 2024. The oil major still has priced options for up to five more additional wells. The 2016-built Ocean GreatWhite sixth-generation Moss CS60E rig can work in water depths of up to 10,000 ft and its maximum drilling depth is 35,000 ft.

Meanwhile, the Ocean BlackHawk drillship has embarked on a one-year firm plus one-year priced option contract with Anadarko Petroleum Corporation, a wholly owned subsidiary of Occidental, in the U.S. Gulf of Mexico in early November 2023. The firm term is expected to run until November 2024. The 2014-built Ocean BlackHawk ultra-deepwater drillship from Hyundai Heavy Industries comes with dynamic-positioning, dual-activity capability, maximum hook-load capacity of 1,250 tons, two seven-ram blowout preventers, water depth capabilities up to 12,000 feet, and drilling depth capabilities up to 40,000 feet. 

On the other hand, the Ocean Courage semi-sub rig concluded its campaign with Petrobras in Brazil in late September 2023 and mobilized to Guanabara Bay to prepare for its next contract with the Brazilian energy giant, which is expected to commence in December and run until December 2027. The 2009-built Ocean Courage rig, which was constructed by Sembcorp Marine in Singapore, is capable of drilling in 10,000 feet of water and its maximum drilling depth is 40,000 ft.

The rig owner’s Ocean Endeavor semi-sub rig has started its two-well contract extension with Shell in the UK with an estimated duration of 120 days in mid-October 2023. After this extension, the rig reverts to the previous rate under the contract and is expected to remain under this deal until December 2024. The semi-sub has been working for the oil major in the UK since May 2019. The 2007-built Ocean Endeavor rig is of ODECO Victory Class design and its maximum drilling depth is 35,000 ft. The rig can carry out assignments in water depths of up to 10,000 ft.

The Ocean Apex semi-sub rig concluded its campaign with Woodside in Australia in early October and mobilized to a standby location for its next contract with Inpex, which began in late October and is expected to run until July 2024. The rig is firmly committed to additional operators – Santos and Chevron – until March 2025. The Ocean Apex rig has a maximum hook-load capacity of 1,000 tons, 15k five-ram preventer, water depth capabilities of up to 6,000 feet, drilling depth capabilities of up to 30,000 feet, variable deck load of 7,000 long tons, and crew quarters for 140 personnel.

In addition, the Vela drillship, which Diamond Offshore manages on behalf of Seadrill (former Aquadrill), has finished operations with BP in the Gulf of Mexico in August 2023 and resumed its contract with Beacon which is expected to run until March 2024.

Diamond Offshore’s contract drilling revenue for 3Q 2023 totaled $245 million, compared to $282 million in the second quarter of 2023. The decrease in revenue quarter-over-quarter was primarily driven by the Ocean BlackHawk’s completion of its Senegal contract and being in a shipyard for upgrades and contract preparation work for the duration of the quarter along with the Ocean Patriot being between contracts, partially offset by the Ocean Apex’s return to work after completion of its second quarter shipyard projects and special survey.

Furthermore, the rig owner’s contract drilling expense for the third quarter of 2023 was $182 million, or a $31 million decrease from the prior quarter, largely due to lower operating costs and the deferral of certain costs associated with the Ocean BlackHawk’s shipyard activities, as the company prepared the rig for its contract starting in the fourth quarter in the Gulf of Mexico. The decrease in contract drilling expense in the quarter also reflected lower repair and maintenance-related costs for the firm’s owned and managed fleet.

The offshore drilling contractor further noted that the general and administrative expenses were $17 million in the third quarter, in line with the prior quarter. Additionally, the results for 3Q 2023 also included a $6.5 million pre-tax loss on extinguishment of debt as a result of the retirement of all existing debt upon the issuance of the senior secured second lien notes.

Diamond Offshore’s tax expense for the third quarter was $125 million compared to a $243 million tax benefit in the prior quarter, reflecting the expected normalization of the firm’s tax expense and reversal of a portion of the previously recorded benefit. The company expects further normalization of its tax expense in the fourth quarter without any meaningful impact on cash tax expense expectations for the full year.

According to Diamond Offshore, its rigs continued to perform well in 3Q 2023, achieving revenue efficiency of approximately 95% across the fleet during the quarter. The rig owner perceives this as “a notable achievement” given the extensive movement of rigs in and out of shipyards and the completion and start-up of contracts during the quarter.

Moreover, the firm earned a seventh bonus for efficient, injury-free performance in Senegal as a result of the combined efforts of the Ocean BlackHawk and Ocean BlackRhino drillships.