The oil and gas equipment services arena encompasses a vast array of different activities, but it is perhaps best illustrated by the image of the large floating offshore drilling rig. This image was the focus of media attention for all the wrong reasons when the drilling rig Deep water Horizon, operated by the world’s largest offshore driller, Transocean (NYQ: RIG, VTX: RIGN), exploded and sank in the Gulf of Mexico in April 2010 claiming 11 lives and causing one of the largest oil spills in history. The spill encapsulated in one single event the world of deep water offshore drilling, where hugely costly pieces of engineering can bring in high rewards, but where the costs associated with failure can also be high.
Clear investment attractions
With spending on exploration and production by the oil super-majors rising by an estimated 7 per cent in 2013 and offshore drilling activity at an all-time high, the underlying investment attractions of the sector are clear, particularly in respect of those drilling in the deep water segment where a supportive oil price (a long-term rate of $95 a barrel is stated as break even for ultra-deep water activity) is encouraging the search for new resources in increasingly demanding environments. While the latest deep water drill-ships come at a cost of over $600m (£382m), debt is readily available and currently very cheap. As the new rigs become operational there is the security of a long-term contract of several years duration with a well funded oil-major at rates of around $600,000 a day for a deep water rig. This supports an internal rate of return (‘IRR’) of 16 per cent and simple Ebitda payback below five times. While shallow water jack-up rigs come cheaper at around $200m, the returns are not as attractive as those enjoyed by the deep water drillers.