Odfjell: Boost in oil & gas investments to ramp up drilling activity as market strengthens
Norwegian offshore drilling contractor Odfjell Drilling is seeing an increase in demand for offshore rigs with average utilisation of 97.1 per cent for its own fleet. The rig owner anticipates that this positive momentum will continue bolstered by an increase in oil and gas investments. As a result, day rates are expected to grow while long-term contracts become more readily available.
In its report for the third quarter of 2022, issued on Thursday, Odfjell Drilling posted operating revenue of $165 million for 3Q 2022, compared to $154 million in 3Q 2021. This is an increase of $11 million, mainly due to increased activity in the external fleet segment containing the rigs the firm manages for other rig owners. Regarding its own fleet, there was an increase in the third quarter of 2022 compared to the previous quarter in performance bonuses and fuel incentives paid by clients.
The drilling contractor reported an EBITDA of $81 million in 3Q 2022, compared to $77 million in 3Q 2021, an increase of $4 million. Odfjell Drilling’s net profit from continuing operations in Q3 2022 was $12 million, compared to $28 million in 3Q 2021. On 30 September 2022, cash and cash equivalents amounted to $155 million. The firm’s net cash flow from continuing operating activities in Q3 2022 was $64 million, compared to $60 million in 3Q 2021.
The Norwegian player outlined that the net interest-bearing debt as of 30 September 2022 amounted to $647 million, compared to $863 million as of 31 December 2021. This is a decrease of $216 million, due to paid instalments and the net interest-bearing debt within the discontinued operations.
Odfjell Drilling’s Deepsea Stavanger, Deepsea Atlantic and Deepsea Aberdeen rigs have been operating for Equinor on the NCS during the third quarter of 2022. On the other hand, the Deepsea Stavanger and Deepsea Atlantic rigs had some downtime in this quarter due to planned maintenance while the Deepsea Nordkapp rig has been operating for Aker BP on the NCS.
Recent rig deals boosting backlog
The Norwegian firm secured several contracts and extensions for its own fleet of rigs during 3Q 2022. In line with this, the Deepsea Stavanger rig was awarded a five-year firm contract with Aker BP in August 2022. This deal is scheduled to start in early 2025 and the day rates for the contract will be market-based, within a pre-agreed range.
According to the company’s statement, the base contract value is in the range of $620 million to $730 million, where the ceiling of the day rate range shall be adjusted based on an inflation adjustment formula starting from June 2023. Aker BP is also expected to pay performance and fuel savings incentive bonuses.
At the start of September 2022, Aker BP added more firm wells to the Deepsea Nordkapp rig with an estimated duration of approximately six months, which will keep the unit occupied into late Q3 2024. The offshore drilling contractor underlined that the approximate contract value for the exercised wells is $60 million – excluding any integrated services – while a performance and fuel incentive bonus will be applicable.
At the end of September 2022, Equinor exercised a further well option for the Deepsea Stavanger rig, which has an estimated duration of 120 days, thus, the rig’s firm backlog now extends into Q4 2023. Odfjell Drilling underscored that the day rate is similar to the current contract up to 1 May 2023. Afterwards, there will be an increase if certain CO2 targets have been achieved. A notable performance incentive rate will also apply when wells are delivered safely and ahead of target, explained the Norwegian player.
Several deals have also been awarded for rigs managed by Odfjell Drilling. In lieu of this, work was secured for Northern Ocean’s Deepsea Bollsta rig in August 2022 with Shell in Namibia. This contract is expected to start shortly and has an estimated firm duration of twelve months plus one six-month option.
On 18 November 2022, ExxonMobil hired SFL Corporations’ Hercules rig for work in Canada. The contract is expected to begin in Q2 2023 and has a firm duration of approximately 135 days, with an extension option for approximately 60 days. Additionally, there have been several short contract awards for the Deepsea Yantai rig, which will keep the unit occupied for large parts of 2023.
As high energy prices and the focus on energy security permeate the global stage, E&P companies have seen unprecedented cash flow generation. Bearing this in mind, the Norwegian firm believes that investments in oil and gas production will increase significantly in the coming years and lead to higher drilling activity.
Odfjell Drilling outlined that it continues to see an increase in tender and contracting activity, both in the North Sea and internationally. While the fleet of drilling units has seen a significant reduction over the past years, a continued market strengthening is observed.
The drilling contractor pointed out that activity levels in the United Kingdom are expected to increase in the near term, occupying older drilling units currently in the UK with additional supply coming from outside the UK. With the government preparing to issue more than 100 new licences, activity levels in the UK are likely to be sustained in the years ahead.
The temporary tax regime in Norway, which incentivises acceleration of project sanctioning, is resulting in a significant increase in the submission of plans for development and operation (PDOs) this year, as operators look to meet the 2022 submission deadline. Odfjell Drilling expects that more units will leave Norway for near-term international opportunities.
Taking into consideration certain barriers to entering Norway and the lack of newbuild activity, the mobilisation of incremental supply to Norway is inherently limited. This may result in demand outpacing available supply in Norway in years beyond 2023, explained the rig owner.
Odfjell Drilling believes that this combination of factors will lead to longer-term contracts and upward pressure on day rates in Norway.