Noble-Diamond Offshore merger process is off to a good start: Will it prompt further rig market consolidation moves?

Two Texas-headquartered offshore drilling giants, Noble Corporation and Diamond Offshore, have gotten one of the key conditions necessary to move forward with their business combination out of the way, enabling them to proceed with closing the deal. With two of the world’s top five floating rig contractors merging into one, the market consolidation trend is ripe for further such moves, bringing the possibility of transformation endeavors in existing business models and a potential shift in offshore rig supply and demand dynamics.

Once the two U.S. offshore drillers disclosed their merger plan for a $600 million stock plus cash transaction on June 10, 2024, it became clear that Diamond Offshore’s rigs would become part of Noble Corporation’s fleet, as the latter has taken this step to enlarge its fleet to 41 rigs, encompassing 28 floaters and 13 jack-ups. This business combination is expected to result in a combined backlog of $6.5 billion.

Both players have now confirmed that the waiting period for the pending merger expired on July 24, 2024, under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, designed to provide notice to the federal antitrust enforcement agencies, the Federal Trade Commission (FTC) and the U.S. Department of Justice Antitrust Division (DOJ), in advance of major mergers and acquisitions.

Therefore, the completion of the business combination is now subject to the satisfaction of the remaining customary closing conditions, including approval by Diamond’s stockholders and the receipt of informal clearance by the Australian Competition & Consumer Commission. As a result, a special meeting of Diamond stockholders to vote on the transaction is scheduled for August 27, 2024.

Wood Mackenzie believes that Noble grabbed the first mover advantage with the move to bring Diamond Offshore into its fold, as the energy intelligence group is convinced that the offshore rig market consolidation is just beginning, thus, more such steps are looming on the horizon, given the fact that over 60% of the total floater backlog is now with four drilling contractors.

Leslie Cook, Principal Analyst of Upstream Supply Chain for Wood Mackenzie, highlighted: “We have been predicting offshore rig market consolidation for some time and with little appetite from owners to add new rigs as rig demand is flattening out, we believed growth would be inorganic. It therefore comes as little surprise that the first major deal in the upstream service sector has been announced. Noble has grabbed first mover advantage, and solidified its status in the top two offshore rig contractors.”

The merger between the two U.S. rig owners is said to position Noble well in the most commercially advantageous markets; leverage economies of scale; provide a good cultural fit; broaden client footprint, improve access to UK and Australian markets, and strengthen the firm’s competitive position in the lucrative U.S. Gulf of Mexico market.

Aside from this, Wood Mackenzie notes that the business combination diversifies Noble’s portfolio without diluting the marketability of assets, thus, if expected synergies and costs are realized, it will increase effective utilization and make the firm’s fleet more competitive.

Cook underscored: “With this deal, more than 60% of total floater backlog is with four drilling contractors. While we believe this will have little impact on day rates in the shorter term, we do believe that the consolidation of the market will afford rig contractors more control in the medium and long term. With day rates currently reaching US$500k/day, this will be an ongoing concern for operators adhering to capital discipline and planning for long-term drilling programmes.”

Other analysts point out that the Noble-Diamond Offshore merger will put pressure on Transocean, Seadrill, and Valaris to follow suit by pursuing similar arrangements to seize growth opportunities in the dynamic offshore drilling ecosystem, especially the last two drilling contractors since the first has kept its spot as the alpha of the floating rig domain. Otherwise, Valaris, which will switch places with Noble going from the second biggest floating rig player to occupy the third place, and Seadrill may get a much smaller slice of the floating rig market cake in the future.

Certain divestment and acquisition patterns from giant global oil and gas operators and players show a decisive pivot to offshore assets and liquefied natural gas (LNG) opportunities, as confirmed by the recent string of onshore portfolio sales in Nigeria, which were announced by Eni, Shell, TotalEnergies, and Equinor over the past few months. All four, alongside multiple others, have plans to drill more offshore exploration wells and unlock further hydrocarbon reserves. This will bring more work to rig owners.

Cinnamon Edralin, Westwood‘s Americas Research Director, emphasizes that strong demand is lowering the pressure on rig contractors to decrease supply, thus, sales for scrapping and conversions have slowed considerably, with the market experiencing a rise in the reactivation of idle rigs. In line with this, Westwood’s RigLogix data shows that the global offshore rig fleet had 728 jack-ups, semi-submersibles, and drillships at the end of 2023, down by a net one rig from the end of 2022.

Moreover, 33 rigs were added to the working fleet at the end of 2023 compared to the figure recorded during the prior year, with the ten largest managers controlling 56% of the working units globally. With jack-ups, semi-submersibles, and drillships costing on average $118,000, $368,000, and $419,000, respectively, the price to hire an offshore rig hit a nine-year high in 2023, representing an overall 54% spike in day rates compared to 2021, based on Westwood’s data.

This cost hike, spurred by higher global rig demand, rising utilization, and tightening availability, is a factor in the slowdown in contracting activity, according to Teresa Wilkie, Director at RigLogix, who claims that operators are taking stock of their current rig provisions and looking at ways to keep future projects economical, while also being careful to ensure the right rig selection, especially for long-term campaigns.

Last year was a busy one for the global offshore drilling fleet, as several stacked rigs got work assignments and multiple stranded newbuilds, which were held up in the construction process following the market downturn, got new owners. One of the rig owners that expanded its fleet in 2023 is China Oilfield Services (COSL), which kept its position as the largest rig contractor in terms of managed rig fleet size with 67 units.

Furthermore, Westwood underlines that COSL enriched its fleet with four Friede & Goldman JU-2000E design newbuild jack-ups, which were stranded at Dalian Shipbuilding, for $446 million. Originally ordered by Seadrill in 2013 and canceled in 2018 and 2019, these rigs are now called Hai Yang Shi You 945, Hai Yang Shi You 946, Hai Yang Shi You 947, and Hai Yang Shi You 948.

Following six jack-ups and three drillship deliveries last year, the number of offshore rigs under construction dropped by nine while the figure for stacked rigs and those at shipyards decreased by 25. As a result, nine more drillships, three semi-subs, and 21 jack-ups joined the working fleet in 2023 compared to 2022 with the Middle East driving the double-digit uptick in jack-up demand, increasing from 138 to 170.

While the biggest regional drops in jack-up demand were recorded in the Asia Pacific, down six, and the North Sea, down four, the UK saw a continued fall in demand for both jack-ups and semi-subs partly in response to the Energy Profits Levy, which was introduced in 2022 and is now set to expire in March 2028 after initially being set to expire in December 2025.

Westwood predicts that Latin America and West Africa will likely add more floaters, however, the Middle East is anticipated to remain the biggest driver of jack-up demand, despite the Saudi Aramco suspensions. The energy market intelligence provider notes that the top ten drilling contractors continue to dominate, as they control the largest number of rigs with over half the total fleets managed by the group in certain regions, such as:

• U.S. Gulf of Mexico at 81% with Enterprise and Transocean as the biggest players
• North Sea at 59% with Noble and Valaris accounting for the majority of the market share
• Middle East at 63% with ADES and ADNOC being the largest by far
• West Africa is just below half at 49% with Shelf Drilling, Valaris, and Noble managing most of the rigs
• Latin America offered much less space to the top ten drilling contractors, as they managed only 29% of the rigs in the region, with Valaris, Noble, and Borr Drilling running the show
• COSL is in charge in Asia Pacific with 51 rigs, mostly deployed in China, Indonesia, and Malaysia

“Additional work is expected to emerge in 2025, but one or more of the idle semisubs may be cold stacked to reduce costs and competition within this segment. Jackups may also show some near-term softness, with Saudi Aramco reportedly suspending 20-25 units for periods up to one year, not all of which may be able to transition to new jobs by the end of this year,” explained Edralin.

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