The “magic” of $50 oil is now in the sights of deep-sea drillers as they try to lure customer spending from shale wells on land.
And after more than three years of pain, that prospect has some investors excited. Transocean Ltd rose the most in more than eight months after the world’s biggest provider of offshore rigs predicted explorers could soon shift their spending from land to sea as crude futures inch closer to the key level. Shares of other deepwater service providers like Diamond Offshore Drilling Inc and Noble Corp Plc also surged on the heels of Transocean’s rally.
“Break-even costs in multiple deepwater basins around the world are consistently coming in below $50 and are now often around, if not below, $40,” Chief Executive Officer Jeremy Thigpen told analysts and investors Thursday on a conference call. “Deep-water break-evens are starting to compare favourably with onshore, which by the way is now experiencing some fairly significant price inflation across most products and services.”
The global oil downturn hit offshore drillers with the double whammy of a drop in customer demand for their services and a glut of new rigs rolling out of shipyards. More than three quarters of Transocean’s sales have been carved away since hitting a peak of $3.3 billion at the end of 2008, according to data compiled by Bloomberg.
A little more than half of the oil industry’s 817 offshore rigs were working in the second quarter, down from the 92 per cent utilisation rate for global rigs in 2008, Jud Bailey, an analyst at Wells Fargo, wrote last month in a note to investors.
The Vernier, Switzerland-based owner of deepwater rigs said it’s signed a dozen new drilling contracts or extensions to pacts so far this year, adding $221 million in future work. The entire offshore industry has announced almost as much new work this year as it had in the past two years combined, Terry Bonno, the company’s senior vice president of industry and community relations, said on the call.
“It is beginning to feel a lot like we are moving off bottom,” she said. Explorers are expected to sanction more deepwater projects next year if oil holds above “the magic $50 level,” Bonno said. But if oil falls below that mark, those projects could be re-evaluated and delayed.
Transocean rose 7.7 per cent to $9.30 at 1:38pm in New York, after earlier climbing as much as 11 per cent for the biggest intraday rise since Nov. 30. Transocean’s comments were enough to boost shares for its six closest offshore peers, which all climbed at least 5 per cent on Thursday.
While the development costs for deepwater projects have fallen below $50 in many cases, the time to bring offshore projects to production is still several years, compared to a matter of months for shale work, J. David Anderson, an analyst at Barclays, said Thursday in a phone interview.
“Shale wins in every race,” Anderson said. “As oil starts to move up above $50, shale will come on much faster.”
But shale wells can fade in a matter of months, too, while offshore wells can gush oil for decades after they’ve been developed. Average hydraulic fracturing prices for onshore work are up 50 to 100 per cent from the lowest point in the downturn, Brad Handler, an analyst at Jefferies, wrote last month in a note to investors.
