John Fredriksen’s $3.6 billion bet that ever-greater demand for crude oil will be met from reserves buried miles beneath the ocean surface is poised to reap at least three years of record profit for his company Seadrill Ltd. (SDRL)
The billionaire is adding six drillships to his fleet of four within two years, driving net income higher through 2014, mean estimates of 60 analysts compiled by Bloomberg show. The vessels, boring as much as seven miles under the waves, will earn an average of $625,000 a day a year from now, 21 percent more than in 2011, according to RS Platou Markets AS, an investment bank in Oslo. Shares of Seadrill will rise 22 percent in the next 12 months, according to the average of 23 forecasts.
The Hamilton, Bermuda-based company ordered the vessels before finding clients for them, allowing it to expand faster than rivals as rates surge. Fredriksen, who controls the world’s biggest supertanker fleet, is betting demand will strengthen as energy explorers move further offshore. Petroleo Brasileiro SA, owner of the Western Hemisphere’s largest oil discovery in three decades, will hire 20 more rigs to drill 32 new wells this year, it said May 18.
“The industry is pushing further into deeper waters, and drillships are the most versatile assets in the fleet,” said James West, an analyst at Barclays Plc in New York whose recommendations on the shares of offshore energy exploration and production companies returned 26 percent in the past two years. “Seadrill is by far the most aggressive builder, and they’ll be in a great position to supply those ships to the market.”
The drillships cost about $600 million to build, an amount that can be recouped in as little as four years, according to Carnegie ASA, an investment bank in Oslo. That contrasts with the very large crude carriers owned by Fredriksen’s Frontline Ltd. and Frontline 2012 Ltd. The vessels, each hauling 2 million barrels, are earning $30,314 a day, down from an average of $97,154 in 2008, according to data from London-based Clarkson Plc, the world’s biggest shipbroker.
Seadrill will report an 8.2 percent increase in net income to $1.54 billion this year, the most ever, according to the mean of 22 analyst estimates compiled by Bloomberg. They also expect more profit in each of the following two years. The anticipated jump in charter rates means revenue from drilling in 2013 will be 23 percent higher than in 2011, while the operating costs rise 16 percent, according to New York-based Dahlman Rose & Co.
Shares of the company, up 1.2 percent to 202.4 kroner in Oslo trading this year, are forecast by analysts to reach 246.34 kroner in 12 months. The Lloyd’s List-Bloomberg Top 50 Shipping Index of the largest companies in the industry declined 2.3 percent since the start of January.
Seadrill’s strategy of speculative ordering started when the company was founded in 2005. Most of its 27 drillships and offshore oil rigs were bought that way, said Alf Christian Thorkildsen, chief executive officer of the management unit. That means the company can add capacity at a time of rising rates more quickly than rivals who need to lock in charters, as well as giving it the first slots at ship yards.
“We get a chance to have an advantage on others that are not ready to build on spec,” Thorkildsen said by phone June 6 from Stavanger, Norway. “That’s where the excitement is. We are all a bit more certain about the future based on finds and what we see in the offshore part of the world.”
Transocean Ltd. (RIG:US), the biggest owner of drillships, hasn’t ordered a new one since at least 2010, data from the company show. Speculative building isn’t good for Transocean or for the industry because it can lead to a capacity glut, CEO Steven Newman told analysts on a conference call in August. The Vernier, Switzerland-based company has two drillships under construction from its October acquisition of Aker Drilling ASA.
The acceleration in underwater exploration for oil and gas may slow as prices slump. Crude tumbled 16 percent to $83.35 a barrel in New York this year on mounting concern about global growth as natural-gas futures tumbled 25 percent to $2.241 per million British thermal units because of a U.S. supply glut.
Spending on exploration and production fell 15 percent in 2009, a year after oil plunged 53 percent amid the global recession, according to data compiled by Bloomberg Industries energy analysts led by Christian O’Neill. While Australia and China cut interest rates last week to boost growth, crude futures plunged as much as 3.3 percent on June 8 after Federal Reserve Chairman Ben S. Bernanke damped investors’ expectations for monetary stimulus in testimony to Congress.
Offshore exploration also may be stymied by increasing environmental-impact concerns. An explosion in April 2010 at BP Plc’s Macondo well in the Gulf of Mexico killed 11 workers and caused the biggest offshore oil spill in U.S. history. The Deepwater Horizon rig drilling the well and operated by Transocean sank. London-based BP agreed in March to pay at least $7.8 billion to settle private claims.
Petrobras, as Rio de Janeiro-based Petroleo Brasileiro is known, found about 6.5 billion barrels of oil and natural gas in its Lula field about 150 miles off the coast of Brazil, according to the U.S. Department of Energy. The reserves are as much as 3.4 miles under the ocean surface.
Slowing economic growth is proving no bar to rising oil demand, according to the International Energy Agency, which last month raised its estimate for global consumption by 80,000 barrels to 90 million barrels a day. Even after this year’s slump, crude prices are still 26 percent above the 10-year average, stoking spending on exploration.
Depleted land reserves are spurring more drilling at sea, where the deepest find has been Murphy Oil Corp.’s Lloyd Ridge 370 Diamond discovery in the Gulf of Mexico in 2008, in waters almost 1.9 miles down. The latest drillships, held in place by thrusters, can work in seas 2.2 miles deep and extract crude from wells seven miles down, Seadrill’s website shows. The average depth of new discoveries since 2011 was 2,000 feet, from 1,600 feet in the preceding five years, according to London- based Infield Systems Ltd., an industry consultant.
Drillships also carry more of their own equipment than oil rigs, giving them an advantage in remote locations that are harder to resupply. A jack-up rig, which stands on the ocean floor, can work in depths of up to 500 feet. A semi-submersible rig using flotation tanks goes as deep as 1.9 miles, data compiled by Bloomberg Industries show.
Seadrill is the world’s third-largest owner of drillships after Transocean and Baar, Switzerland-based Noble (NE:US) Corp. Shares of Transocean rose 9.7 percent to $42.10 this year and will reach $64.84 in 12 months, the average of 28 analyst estimates compiled by Bloomberg shows. Noble advanced 4.2 percent to $31.50 and will be at $45.89 in a year, based on 27 forecasts.
At least 20 offshore oil fields were discovered every year since 2006, Noble CEO David Williams said on a conference call last month. About 284 wells will be drilled at sea this year, 20 percent more than in 2011, Morgan Stanley estimates. Companies are spending four times more than a decade ago on exploration and production to pump 45 percent more oil and gas, according to data compiled by Bloomberg Industries’ energy analysts.
Contracting demand in Europe, which accounts for about 16 percent of global oil consumption, will be offset by expanding needs in developing economies from Africa to Asia to Latin America, according to the Paris-based IEA. That’s also helping to lift returns for other types of ships.
Rates for VLCCs rose 28 percent in the past year, according to Clarkson. While they exceeded the $24,100 that Hamilton, Bermuda-based Frontline says it needs to break even, returns slumped from as much as $166,000 in 2008 because of a capacity glut. Fredriksen, 68, split Frontline in two in January to withstand the slump. With stakes in companies owning tankers, dry-bulk commodity carriers, liquefied-natural-gas ships, container lines and fish farms, Fredriksen has public assets valued at more than $9 billion, data compiled by Bloomberg show.
There are currently 87 drillships operating, according to IHS Inc., a research group based in Englewood, Colorado. Samsung (010140) Heavy Industries Co. has orders for 21 new ones valued at about $11.7 billion, according to Clarkson, which estimates a total order book of 54 of the vessels. Samsung, based in Seoul, is building six for Seadrill. The second-largest builder of the ships is Ulsan, South Korea-based Hyundai Heavy Industries Co.
The number of drillships compares with a global rig fleet of 3,335, Baker Hughes Inc. data show. The industry will need twice as many by the end of the decade, estimates Rystad Energy AS, an Oslo-based consultant to oil companies.
“Existing fields are declining fast,” said Jarand Rystad, managing partner at Rystad Energy. “Offshore oilfields need to deliver to avoid a too-high oil price and further slowdown of the global economy.”
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