Oil Rigs Revisit Lehman Crisis as Credit Squeezed for Orders, Acquisitions

By Marianne Stigset - Aug 24, 2011 6:01 AM GMT+0700

The biggest market rout in two years is squeezing credit for oil rig owners in a replay of the crunch that followed Lehman Brothers Holdings Inc.’s collapse, said the operator of the second-largest fleet of deepwater platforms.

“It’s exactly the same as what happened during the financial crisis after Lehman Brothers’ bankruptcy,” Seadrill Ltd. (SDRL) Chief Executive Officer Alf Thorkildsen said. “The financial uncertainty has resulted in fewer new build orders. The eye of the needle has narrowed” for acquisitions, he said.

A four-week slump in global equities wiped out more than $8 trillion in stock values amid renewed signs of weakness in the world economy, Europe’s inability to stem its sovereign debt crisis and a downgrade of U.S. debt. Crude oil prices dropped about 14 percent in the period, while banks have curbed lending, adding to concern producers may cut exploration budgets.

“Seadrill can look at the best opportunities in the market,” Thorkildsen said in a phone interview from Stavanger yesterday. “If there is a good deal to be made, it’s always possible to get financing, but there is a tighter market for financing overall and that affects us all.”

Seadrill purchased 33.75 percent of Asia Offshore Drilling Ltd. last month after billionaire Chairman John Fredriksen said in May he would buy rig companies. The acquisition followed the takeover of Scorpion Offshore Ltd. in 2010, while Seadrill lost a bid against Ensco Plc (ESV) for Pride International Inc. this year.

“Consolidation will come especially with regards to smaller companies that start experiencing financing pressures,” Thorkildsen said. “The underlying market fundamentals for drilling with regards to supply and demand look good.”

Deep, Harsh

Exploration in deep water and harsh environments off the shores of Brazil, West Africa and the Arctic has buoyed demand for rigs able to handle such conditions. Stricter rules after the Deepwater Horizon explosion in the Gulf of Mexico have also spurred interest in newer platforms, boosting prices.

Transocean Ltd. (RIG) last week agreed to buy Aker Drilling ASA for $1.46 billion, almost twice its market value, to expand its so-called ultra-deepwater rig fleet. Ensco’s bid in February for Pride was valued at $8.47 billion including debt, a 24 percent premium. Hamilton, Bermuda-based Seadrill sought to buy both.

“Share prices today are depressed globally, so that is a factor in why we’re seeing higher prices than what’s reflected in the market,” Thorkildsen said. “These were shares that perhaps were somewhat undervalued by the market.”

The MSCI World (MXWO) Index of stocks fell 19 percent from May 2 to Aug. 10, the biggest such decline in more than two years.

Costs Rising

Oil and gas discoveries in offshore Brazil, West Africa and Norway are raising rig demand, supporting the day rates Seadrill gets for leasing drilling platforms, Thorkildsen said. Ultra- deepwater rates were “not too far” from $500,000 a day.

Fees for such operations are averaging $450,000 a day and likely to stabilize around $450,000 to $550,000 going forward, Maersk Drilling CEO Claus Hemmingsen said last week.

The cost of construction has grown 10 percent to 12 percent in the past six months, according to Maersk, which has halted orders while it awaits delivery of six of the facilities. Rates are firm for jack-up rigs, with extending legs, Hemmingsen said.

“The Norway jack-up market has remained fairly high, solidly above $300,000 a day for the big jack-ups,” he said. “Expectations for the new rigs coming in are a lot higher.”

Seadrill will take delivery of 17 rigs, Thorkildsen said.

Second-quarter net income will rise to $329 million, from $316 million a year earlier, when the company reports tomorrow, according to the average estimate of 16 analysts surveyed by Bloomberg. Sales will climb to $1 billion, from $933 million.

Extra Dividend

The company announced in May it would seek to raise long- term dividends to 70 cents a share and pay out an additional 5 cents for the following four quarters.

“Seadrill will look to avoid cutting dividends as the drilling market outlook is solid and Seadrill likely is eager to continue to grow their fleet through acquisitions,” Kjetil Garstad, an Arctic Securities ASA analyst, wrote in a note yesterday in which he upgraded the share to a “buy.”

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net