With credit drying up and pinching much of the oil industry in the drill bit, it is perhaps not surprising that the mammoth rig-building boom of the last few years has virtually ground to a halt.
Perhaps less obvious is the opportunity this represents to drillers, which have waited hungry on the sidelines of the boom for the many upstart builders that sprang up in recent years to founder and sell new rigs at bargain-basement prices.
In the most recent round of conference calls, drillers said they foresee such sales in 2009 since many rig builders cannot lay hands on enough funds to make their next installment payment or finish new construction. Meanwhile, with time and large cash cushions on their side, potential buyers wait for asking prices to plummet.
Even before the current economic downturn and credit drought, established drillers had expected some builders, many based in Europe, would sell their rigs at some point. The drillers figured these “speculative” builders — so-called because their rigs lacked initial contracts to underwrite construction costs — would realize their lack of drilling and operations know-how and bail out of the business.
But so far, the speculative builders appear to be holding out. Drillers continue to claim, as they have for the last few years, that asking prices are still too high. They want a discount to peak rig costs, which for a drillship or semisubmersible was about $600 million, and for a jackup $200 million.
How much of a discount? Noble CEO David Williams let the cat out of the bag, sort of, on his company’s fourth-quarter conference call last month: “Are we looking for something with a three handle [i.e., in the $300 million cost range]? We would love to see it. I’m not sure it’s going to go that low, but clearly prices have to come down off the current ask,” which sources say remains above $500 million.
As for jackups, asking prices may already be under cost, Larry Dickerson, CEO of deepwater driller Diamond Offshore, said. A few years ago his company paid $160 million each to build two jackups. But “I think you could beat that price today,” Dickerson said.
Still, for all the talking, few rigs have been sold. And drillers continue to sit tight, most of them still echoing what Bob Long, CEO of Transocean, the world’s largest driller, told analysts last week: “It’s not really a willing seller/willing buyer market.”