One of Offshore Drilling’s Few Bright Spots Set to Darken

The North Sea has been one of the few bright spots, if we can call it that, for offshore drillers this year, as dayrates have been dropping around the world as rigs come off contract. But Credit Suisse expects the region to get hit come 2015–and expose Rowan (RDC), Seadrill (SDRL), Transocean (RIG) and Diamond Offshore (DO) to more pain.

Reuters

Credit Suisse analyst Gregory Lewis and team explain why now is the time to start worrying about the North Sea:

Robust CAPEX spending the last few years looks to be giving way to more cost conscious customers. Over the last two years rig rental CAPEX has grown at an annual clip of ~15% – in line with the projected rig rental CAPEX spend of 14-15% this year (the reason why North Sea is holding up better than most basins). CAPEX growth has been driven by the top ten players in the basin (Statoil, BP, Total, Conoco, Shell, Rig Management Norway, Lundin, Maersk, GDF Suez and Nexen) which have grown spend ~17% annually over the last five years. This year already has 14% rig rental CAPEX growth in the books which should trend higher over the next few months. However, Statoil (800 lb gorilla in the North Sea) rig rental CAPEX looks to be flattish this year and BP and Shell are set to spend less in the North Sea this year. 2014 is not the problem but more rigs in the region combined with slowing CAPEX points to a lot of question marks in 2015.

Rowan has the most exposure to the North Sea, with 32% of its revenue coming from the region, Lewis says, while Seadrill gets 18% of its sales from the region. But Transocean and Diamond Offshore might have more to worry about.

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Transocean, which gets 26% of its revenue from the North Sea has six rigs rolling off contracts through 2015, while Diamond Offshore, which gets 17% of its revenue from the region has four rigs that will be looking for new work by the end 2015.

Shares of Transocean are little changed at $42.31 at 10:23 a.m. today, while Diamond Offshore has ticked up 0.2% to $51.37, Seadrill has gained 0.7% to $35.72 and Rowan has risen 0.4% to $31.23.