In general, we expect offshore drillers' fourth-quarter results to be fairly ugly, as a combination of ongoing standby agreements in the Gulf of Mexico and contract disputes across the sector will negatively affect the group. Year to date, the Gulf picture is not looking much better as drilling permits for new wells are not being issued. However, there is evidence that the industry is making progress on its relationship with its regulators. The director of the Bureau of Ocean Energy Management, Regulation and Enforcement, Michael Bromwich, has indicated that there won't be any further goalpost moving, where new permitting rules were issued as the industry met the old ones. As a result, we expect to see drilling permits issued for new exploratory and development wells before June.
Outside the Gulf, new-build announcements are coming out on a near-constant basis, with Noble (NE) announcing last week that it intends to build two more deep-water rigs at a cost of $605 million per rig. We think the key drivers are strong secular demand for deep-water rigs, lower shipyard costs, and a growing realisation by drillers that advanced rigs with the latest safety equipment and practices are likely to command premium day rates post-Macondo. On the other hand, the rush by drillers to order new rigs without a contract in place could put a cap on any type of uplift in day rates. We're leaning towards a modest uptick in day rates from around $450,000 now to around $500,000 by the end of 2011.
Stephen Ellis is an Equity Analyst with Morningstar.
