New rig deals bolster day rates and lift Diamond Offshore’s backlog to $1.6 billion

Business & Finance

Offshore drilling contractor Diamond Offshore Drilling tucked under its belt new contracts and extensions for its rig fleet in the U.S. Gulf of Mexico, the UK, and Senegal during the second quarter of 2023. Thanks to the tightening of the offshore drilling market fundamentals, the rig owner is expecting a further boost in day rates and fleet utilisation in the foreseeable future.  

Ocean Endeavor rig; Source: Diamond Offshore

In line with the quarterly results from its peers – Noble, Transocean, and Valaris –  Diamond Offshore also benefited from the ongoing upcycle in the offshore drilling market, which enabled operators to hire rigs well ahead of their drilling campaigns and hand out long-term contracts.

As a result of the rise in rig demand, constraints in supply are rearing their heads, thus, day rates keep inching their way up in this tightening market landscape. While Valaris and Noble got drillship, semi-submersible and jack-up jobs, just like Transocean, Diamond Offshore secured drillship and semi-sub work.

Therefore, Diamond Offshore disclosed contract awards and extensions for two drillships in the U.S. Gulf of Mexico and Senegal along with three semi-submersible rigs in the UK North Sea in its latest fleet status report on 8 August 2023. As a result, the company got $229 million in additional backlog, bringing the total backlog to $1.6 billion.

The rig owner’s average day rate in 2Q 2023 was $299,000 per day, its total fleet utilisation was 70 per cent and revenue efficiency was 95.8 per cent, compared to the average day rate of $272,000 per cent, a fleet utilisation of 63 per cent and revenue efficiency of 95.9 per cent in 1Q 2023.

In contrast, Noble’s marketed fleet utilisation was 76 per cent in the three months that ended on 30 June 2023, compared to 80 per cent in the previous quarter, while Valaris’ total fleet utilisation was 65 per cent during 2Q 2023, compared to 68 per cent for 1Q 2023. On the other hand, Transocean recorded a total fleet utilisation of 54.7 per cent in 2Q 2023, compared to 51.9 per cent in the first quarter of 2023.

Bernie Wolford, Jr., President and Chief Executive Officer of Diamond Offshore, commented: “Our clients continue to commit additional capital to offshore drilling and make critical investments in long-lead subsea equipment. This coupled with strong commodity demand outlooks and favorable economics for deepwater projects are setting the stage for sustainable demand for our drilling services as momentum continues to build in this cycle.

During the quarter, we secured term work for the Ocean BlackHawk and added a two-well contract for the Ocean Patriot, both at higher day rates. We also extended the Ocean Endeavor by two wells, and our customers exercised options for the Ocean GreatWhite and the Ocean BlackRhino.

These wins, which total more than $229 million in additional backlog, provide increased visibility to our 2024 revenue stream and are a testament to our team’s performance. We now have $1.6 billion of backlog with notable average day-rate improvement as we transition to new contracts in the back half of this year.”

Drillships find jobs in U.S. and Africa

According to Diamond Offshore, the Ocean BlackHawk drillship has been awarded a one-year contract with a one-year priced option in the U.S. Gulf of Mexico by Anadarko Petroleum Corporation, a wholly-owned subsidiary of Occidental. This deal is expected to start in November 2023 and run until November 2024.

Previously, the drillship worked in Senegal for Woodside at the Sangomar field development Phase 1, targeting approximately 230 million barrels of crude oil. After completing this job in early July, the rig mobilised to Las Palmas to prepare for its next contract in the Gulf of Mexico.

As the remaining drilling activity is expected to be completed by the Ocean BlackRhino drillship, Woodside has exercised priced option wells in Senegal with an estimated duration of 60 days. The rig is now expected to remain under this contract until June 2024.

The 2014-built Ocean BlackHawk and Ocean BlackRhino are identical ultra-deepwater drillships from Hyundai Heavy Industries, which come 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. 

More work for semi-subs in UK

During 2Q 2023, BP exercised the first option well for the Ocean GreatWhite semi-sub rig. This has an estimated duration of 60 days and is expected to start in mid-January 2024, after the completion of the initial five-well firm period. The oil major still has priced options for up to seven 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.

Moreover, Diamond Offshore got its hands on a two-well extension with Shell for the Ocean Endeavor semi-sub rig, with an estimated duration of 120 days. The contract is slated to begin in early November 2023. This rig 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 offshore drilling giant also landed a two-well contract with Repsol for the Ocean Patriot semi-submersible rig in the UK North Sea, which is scheduled to commence in September 2023. It has an estimated duration of 60 days. The rig concluded its campaign with Apache in the UK in early July 2023. 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.

Meanwhile, the Ocean Apex semi-sub rig concluded its five-year special periodic survey in July and began mobilising to its next contract location in Australia. The start of drilling activities is expected in August 2023. The rig is scheduled to work for Woodside from 3Q 2023 until 4Q 2023 when it will kick off its assignment with Chevron. Afterwards, the rig is slated to start work for Inpex in 1Q 2024 until 3Q 2024 when it will begin its gig with Santos, which is expected to last until 2Q 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.

Additionally, the Vela drillship, which Diamond Offshore manages on behalf of Aquadrill, began operations with BP in the Gulf of Mexico in April 2023. The term is expected to run until August 2023 and thereafter will resume its contract with Beacon, which is expected to run through February 2024.

Revenue boost in 2Q 2023

Diamond Offshore’s contract drilling revenue for 2Q 2023 was $282 million, compared to $232 million in 1Q 2023. This increase in revenue quarter-over-quarter was primarily driven by a full quarter’s utilisation for the Ocean Endeavor and the Ocean GreatWhite rigs, and the Ocean BlackHornet drillship benefiting from a full quarter at its higher day rate, partially offset by the Ocean Apex rig being in the shipyard the entire quarter for its special periodic survey and upgrades. The company elaborated that the results for the second quarter also included $12.2 million in revenue associated with the previously announced termination of the Ocean Patriot rig’s contract in the North Sea.

Furthermore, the rig owner’s contract drilling expense for the second quarter of 2023 increased to $213 million, compared to $173 million in the prior quarter, largely due to higher charter costs for the company’s managed rigs as a result of higher day rates and more revenue earning days in the quarter and the Ocean Apex rig incurring additional costs associated with its shipyard activity during the quarter. Additionally, general and administrative expenses were $17 million in 2Q 2023 compared to $20 million in the prior quarter with the decrease primarily attributable to lower personnel costs and professional fees.

Diamond Offshore further emphasised that the tax benefit for the second quarter was $243 million as compared to $26 million in the prior quarter. The unusually high tax benefit recorded in 2Q 2023 reflects the results of the computation and application of the rig owner’s annual effective tax rate in accordance with U.S. GAAP accounting standards, adjusted for discrete items. The firm expects its tax expense to normalize and the recorded benefit to reverse by year-end.

The offshore drilling player underlines that its rigs continued to perform “exceptionally well,” achieving revenue efficiency of at least 96 per cent for the fifth consecutive quarter, which it perceives to be “a notable achievement.”

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