Oil & gas boom and rig shortage fuel Shelf Drilling CEO’s hopes of multi-year upcycle for jack-ups

Offshore drilling contractor Shelf Drilling has achieved strong operational performance across its rig fleet during the fourth quarter of 2022, aided by the acquisition of five drilling rigs from Noble Corporation. With the oil and gas sector in high demand, the UAE-headquartered giant is envisioning further offshore drilling market improvements, especially within the jack-up segment.  

As the global energy crisis swept across the world in 2022, the energy trilemma became a prevailing concern for countries and companies rushing to ensure energy security while pursuing their net-zero goals to bring a sustainable future to life. Despite the challenges that arose as a result of the energy crisis, 2022 was a bumper year for oil and gas companies, which recorded all-time high profits, thanks to tight supply, high demand, and elevated energy prices.  

Another consequence of the energy crisis was the fast-tracking of certain energy projects, primarily oil and gas ones, and a boost in the search for new hydrocarbon resources, which brought more business to the offshore drilling market, as the demand for rigs skyrocketed while day rates continued to grow. This is demonstrated by the results for the fourth quarter and full-year 2022 announced by Shelf Drilling’s rivals, showcasing the higher day rates secured for rig contracts.

In light of this, Diamond Offshore’s fleet revenue efficiency was 96.4 per cent during 4Q 2022 while the U.S. player’s overall fleet revenue efficiency in 2022 was just under 94 per cent. Diamond is not the only contractor that benefited from the improvement in the offshore drilling market, as Noble’s marketed fleet utilisation was 88 per cent in the three months that ended on 31 December 2022. The firm also reaped benefits from its merger with Maersk Drilling, as its backlog on 31 December 2022 stood at $3.9 billion.

Other offshore drilling contractors also reported a strong operational performance during last year, which is illustrated by Transocean’s total fleet average revenue efficiency of 98 per cent in 4Q 2022 and 96.4 per cent for the full-year 2022 while Valaris delivered revenue efficiency of 98 per cent in the fourth quarter of 2022 and 97 per cent for the full-year 2022. The company secured a contract backlog of more than $400 million during 4Q 2022.

Within its results for the fourth quarter and full-year 2022 released on Monday, 20 March 2023, Shelf Drilling explained that its adjusted revenues were $214.6 million in 4Q 2022 compared to $166.3 million in 3Q 2022. This is a 29 per cent sequential increase compared to 3Q 2022, including $41.2 million in adjusted revenues from Shelf Drilling North Sea (SDNS) acquired rigs, higher effective utilisation and strengthening day rates. The company’s adjusted revenues for the full-year 2022 were $687.6 million compared to nearly $526.6 million for the full-year 2021.

Shelf Drilling explained that its effective utilisation increased to 86 per cent in 4Q 2022 from 85 per cent in 3Q 2022, mainly due to rigs acquired by SDNS in the North Sea and Qatar and the return to operations for two rigs – one in Thailand and one in West Africa – in the latter part of 2022, partly offset by a contract preparation for two rigs in India, which started new three-year contracts in 1Q 2023. The firm underlined that its average earned day rate increased to $66.7 thousand in 4Q 2022 from $62.0 thousand in 3Q 2022.

Furthermore, the company’s operating and maintenance expenses increased by $33.5 million or 38 per cent in 4Q 2022 to $122.3 million, compared to $88.8 million in 3Q 2022, with the sequential increase primarily including higher operating and maintenance expenses of $19.7 million for the recently acquired rigs by SDNS.

On the other hand, the remaining increase of $13.7 million is mainly due to higher operating expenses for one rig in Ghana that started a new contract in October 2022, higher expenses for a rig expected to kick off its new five-year contract in April 2023 in the Arabian Gulf and higher maintenance and mobilisation expenses across the fleet, including contract preparation expenses for two rigs in India and one rig mobilising to Italy, expected to begin a new contract in June 2023.

The UAE player pointed out that its general and administrative expenses of $17.5 million in 4Q 2022 increased by $4.5 million, as compared to $12.9 million in 3Q 2022, primarily due to higher personnel costs and certain one-time costs incurred for the SDNS acquired rigs in 4Q 2022 compared to 3Q 2022.

Moreover, Shelf Drilling’s adjusted EBITDA for 4Q 2022 was $75.5 million, compared to $65.8 million for 3Q 2022, including $17.0 million from SDNS. This represents an adjusted EBITDA margin of 35 per cent for 4Q 2022, which decreased from 40 per cent in 3Q 2022. The full-year 2022 adjusted EBITDA was $248.6 million, compared to almost $158.3 million for the full-year 2021, representing an adjusted EBITDA margin of 36 per cent.

The company elaborated that its capital expenditures and deferred costs of $471.3 million in 4Q 2022 increased by $411.5 million from $59.9 million in 3Q 2022, primarily due to $417.7 million for the acquisition of five jack-ups by SDNS in October 2022, $4.4 million higher spending across the rest of the fleet, mainly related to the commencement of a new contract preparation project for the Harvey H. Ward rig, partially offset by $10.4 million lower rig readiness expenditures for the Shelf Drilling Victory rig acquired in 3Q 2022.

Both rigs are expected to start new long-term contracts in the Arabian Gulf in April 2023. The firm’s 4Q 2022 ending cash and cash equivalents balance of $140.8 million decreased by $16.1 million from $156.9 million at the end of 3Q 2022, mainly due to the completion of the acquisition of the five high-specification jack-up rigs from Noble.

Shelf Drilling’s total debt on 31 December 2022 was $1.4 billion while its contract backlog was $2.7 billion across 35 contracted rigs, representing a marketed utilisation of 97 per cent. In February 2023, the firm completed the issuance of 17.6 million common shares resulting in net proceeds of $43.8 million, which will be used for general corporate purposes, including capex requirements associated with multiple recent long-term contract awards.

David Mullen, Shelf Drilling’s Chief Executive Officer, commented: “During the fourth quarter of 2022, our EBITDA increased 14 per cent sequentially to $75 million, mainly due to the integration of the five premium harsh environment jack-ups acquired in October 2022. This acquisition, combined with continued strong operational performance across the fleet, allowed us to conclude a very positive year for the company, and I would like to thank the entire Shelf Drilling team for their contributions.

“Our tendering and marketing activity continued to build positive momentum in the fourth quarter with long-term contracts and contract extensions in the Arabian Gulf, Angola, Italy and India. Our backlog was $2.7 billion with 35 of our 36 rigs under contract as of 31 December 2022.”

Subsequent to 31 December 2022, Shelf Drilling secured new awards with five total rig years added across three standard jack-up rigs in India and Egypt – Trident II, Trident 16 and Rig 141 – for a total backlog addition of $111 million. Additionally, the Shelf Drilling Scepter rig was awarded a two-year contract in Nigeria, which is expected to commence in May 2023. This deal comes with a total contract value of $118 million, including mobilisation revenue.

“The recent awards in West Africa will drive further growth in our backlog in the first quarter of 2023. After several challenging years, the industry has reached an inflexion point. With a constructive backdrop for oil and gas and a shortage of rig capacity, I expect to see a multi-year upcycle in the jack-up market,” emphasised Mullen.

According to Shelf Drilling’s latest fleet status report, after the Key Singapore jack-up rig got a one-well extension with Cairn on the East Coast of India, which is expected to start in April 2023 and take four months – excluding the mobilisation time –  the rig also secured a three-year contract with ONGC in India. This deal is slated to begin in December 2023, following the completion of its current contract and a contract preparation project. The total contract value, including mobilisation revenue, is about $85 million.

In addition, the Baltic rig won a contract extension for one firm well plus two optional wells with TotalEnergies in Nigeria, which will extend the rig’s assignment with the French energy giant until April 2023, while the Shelf Drilling Fortress rig completed its contract in the UK with the same oil major in January 2023. Shelf Drilling says that this rig is available and being marketed for multiple opportunities.

“The actions taken in 2022 to transform our fleet have positioned us well to take full advantage of the improving fundamentals. Our strong customer relations and unique operating platform, combined with the dedication and commitment of our people, are key factors that will enable us to deliver outstanding value to all of our stakeholders,” concluded Mullen.