In the world of oil, offshore drilling comprises about 30% of all production. Projects take years to develop and require extremely expensive equipment. Deepwater drilling rigs can cost over $600 million to build and earn day rates in the range of $200,000-$600,000. As a result, it requires large amounts of capital to develop offshore fields and the customer base consists of the world’s largest oil companies.
The companies that charter drilling rigs have a history of great boom and bust. The timing for when the next up-cycle may be in full swing is still murky. In fact, this down turn may be one of the most severe as several companies have noted that capital spending at major oil companies has never been cut three years in a row, and from the table on the next page it appears a fourth is likely. However, looking at earnings and dividends during the good times, many people do not remember how much cash flow these companies can produce. Thus, we think it is worth following this group.
We will note that we currently have zero investments in this industry and will need to see more tangible evidence of the turnaround. Read the rest of the article here