Brazilian Deepwater Rig Market
SECTOR REVIEW
Insight Offshore (July MODU): Caipirinhas for
Contractors
This report marks the launch of a multi-part series on the Brazilian deepwater
market. In this report, we do a deep-dive on the status of deepwater rigs contracted
under Phase I & Phase II of Petrobras’ deepwater rig expansion program and
implications for drilling contractors and rig capital equipment providers.
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Bold Petrobras capex program taken with grain of salt. In January, PBR
announced a significant increase to its 5-year budget, boosting capex to $174.4
billion for 2009-13 from $112.4 billion for 2008-12 or 55%. The lion’s share of
the $62 billion increase was related to new projects ($47.9 billion) and industry
cost inflation ($17.0 billion), with the bulk of new project spending earmarked for
the pre-salt. While the spending plan was bullish for deepwater levered OFS
companies, a significant portion of the investment plan was flexible and subject
to modification, which created uncertainty on whether PBR could execute such
an ambitious spending program amid the weakening economic picture.
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BNDES, Chinese to the rescue. In January, PBR identified a $37 billion
funding gap for 2009-10 under its new budget assuming a conservative oil price
of $38.50/bbl. Benefiting from higher oil prices, Credit Suisse’s Latin American
Oil and Gas research team led by Emerson Leite believes the funding gap has
shrunk to $25.5 billion. As a result of $12.5 billion of funding from the Brazilian
Development Bank (BNDES), $10 billion of funding from the China
Development Bank (CDB) that was executed in conjunction with a long-term oil
supply agreement, and other financing steps, PBR has ample liquidity to
execute its capex program, which significantly reduces capex risk for OFS
companies, in our view.
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High success rate driving significant rig demand. Since commencing its
Santos Basin pre-salt exploration program in 2006, PBR has drilled 11 out of 11
successful exploration wells in this play on an operated basis, including multibillion
barrel discoveries at Tupi, Iara, and Guara. In addition, PBR has
participated in a dry hole at the Guarani prospect in BM-S-22 with XOM and an
apparent discovery at Corcovado in BM-S-52 with BG Group. Exploration
success and limited ultra-deepwater rig capacity in the country have driven an
aggressive deepwater rig expansion program by PBR.
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Rig expansion program includes 3 phases. In the first phase, PBR signed
term contracts for 14 ultra-deepwater rigs with anticipated delivery dates
between 2009 and 2011, while the second phase encompassed term contracts
on 12 deepwater rigs with 2012 delivery dates. Meanwhile, the final phase is
expected to include 28 incremental deepwater rigs, but tenders have not yet
been issued.
Some delays, but rigs under Phase I are moving forward largely
unscathed. Our analysis indicates that construction efforts are ongoing on the
bulk of the 14 newbuilds under Phase I as these rigs largely received financing
prior to the virtual shutdown of capital markets in the back half of 2008 and
early 2009. Of these 14 rigs, we believe 12 are moving forward for Petrobras,
albeit with some delays.
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Many newbuilds under Phase II appear to be at risk, which we view as a
headwind for rig capital equipment suppliers such as NOV and Aker
Kvaerner. Phase II of the ultra-deepwater expansion program began in 2008,
with the awarding of 12 long-term contracts. Most of the contracts were
awarded to local Brazilian companies, many of whom were new market entrants
to the offshore drilling space. As a result of the deterioration in macro
conditions, a significant number of the newbuild construction projects are at risk
despite securing firm contracts from Petrobras. Our analysis indicates that only
5 of the 12 newbuild projects are moving forward, with 2 more Schahin drillships
possible in Korea. It appears that 5 of the rigs may not move ahead given the
lack of credit availability, including the Scorpion newbuild that was canceled in
January 2009. We believe the sizeable number of projects that may not move
forward could be a headwind for rig capital equipment providers such as
National Oilwell Varco (NOV) and Aker Kvaerner (AKVER.OL) in Norway.
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ANP decision has caused PBR to accelerate its drilling activities. In May,
the ANP refused a request from Petrobras to extend the appraisal period of five
blocks in the Tupi cluster, BM-S-8, BM-S-9, BM-S-10, BM-S-11 and BM-S-21
by an additional four years. As a result of this decision, PBR appears to be
taking steps to contract existing deepwater rigs to reduce risk of acreage
relinquishment, particularly in light of significant newbuild delivery risk from
Phases 1 and 2 of their deepwater rig program. Recent term contracts on
Odfjell’s Deepsea Stavanger (10,000 ft semi) and Transocean’s Cajun Express
(8,500’ semi) suggest PBR is accelerating its drilling program to protect its
acreage.
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More contracts are possible. We believe established ultra-deepwater drilling
contractors such as Seadrill (SDRL), Transocean (RIG), Noble (RIG), Pride
International (PDE), and Diamond Offshore (DO) could benefit from rising
incremental demand from Brazil, with SDRL well-positioned on its West Gemini
drillship given an advantageous Q210 delivery date. The market’s favorable
reaction to RIG’s 3-year contract on the Cajun Express at a maximum dayrate
of $510K suggests that future potential contracts from PBR could be catalysts
for the deepwater focused drillers. In our coverage group, our top picks remain
RIG, NE, and SDRL.