"fundamental" analysis in the commodity space, whether it's oil, PMs, etc. always has the same vibe: very high conviction opinions by what seems to the outsider as very knowledgeable sources, such as CEOs, etc. that somehow never translates into actual profits in the bank for the hapless equity investor unwise enough to be using it as the basis for trade decisions. In the rear-view mirror, it almost always feels like some variation of three-card monty.
Offshore equity returns have been hideous this year, despite assurances of new cycles, new finds, new tech, etc. For me, the ONLY play that has any chance is their debt, which seems relatively investable (fingers crossed...), producing robust income, and at least a theoretical possibility of return of principal (we'll see...).
In spite of the above, I do appreciate these updates--they are definitely better than operating completely in the dark.
Gordon, thanks for the well-reasoned feedback. It's a challenging industry that's a derivative of a volatile commodity although I do think sustainable shareholder returns are on the horizon in future years but admit that is a speculative view as of March 2025.
Agree with you on the debt. My background is in credit and I plan more coverage of fixed income. Jackup vs Deepwater credit views are next up. Thank you for your interest.
Tommy, thanks as always for your analysis! I'm definitely looking forward to the credit analysis, especially as it relates to BORR. On a related note, is there a general rule of thumb that can be applied for the per day or annual cost of warm stacking a JU rig? This will help me determine how many rigs in BORRs fleet need to be deployed at 150k/d to meet their interest & debt amortization payments. Thanks!
Good question and thanks for continuing to read. Not easy to pinpoint warm stack JU costs. It depends on various factors (i.e. region, rig type) but I generally assume $40-$45k/day. If anyone out there disagrees, I am all ears. I believe Borr is close to $150k/day for 2025 but I expect lower rates when filling up current availability for 2026.
My only data point is a recent BORR presentation, I think from Q3 24 earnings.... They had $59k/d In OPEX for an active rig, so I wasn't sure how much less it would be to maintain a warm stacked rig.
Also, regarding rates and utilization for '26... I posted this on X recently and am including it here in case it sparks additional dialogue on ST:
"What I can't reconcile: global oil demand steady & inventories drawing from a low-ish level. At these prices, offshore barrels more profitable than others. So... isn't contracting just a matter of time? If not, where will the barrels come from? What am I missing?"
Thanks for sharing, legend! I must ask on the shallow water / oil sensivitiy point - why is deepwater CapEx not more sensitive than shallow water? Does the oil not price not have a bigger hit on deepwater NPV given the longer payback period on CapEx?
Thanks for reading. Will cover this in greater detail next article on Saturday AM but jackup demand was meaningfully impacted by Saudi Aramco capacity expansion from 12 million bpd to 13 million bpd. That was shallow water jack up demand. Saudi rig suspensions put dozens of jackups back on the market bc Saudi didn’t need to build its capacity bc existing spare capacity.
At what price does Saudi begin to grow their spare capacity? That’s when jackup demand increases like it did in 2023 but I don’t expect to see that until Brent is comfortably above $85. 7G drillships come on line with multi year contracts before that IMO
The Noble sell-off post-earnings absolutely boggles my mind. Mid point of their 2025 guidance should result in >8% FCF yield (at current price) as you say, with most of that contracted. Sure there debt is a bit higher than for example Valaris but their FCF outlook for this year is also significantly higher.
You have to be really bearish on '26 and beyond to think this is close to fair value. Insiders seem to agree as there has been some buying which is nice to see.
Also despite the high dividend NE '27 leaps seem quite interesting.
The dividend yield pays investors to wait and I agree its good to see insider purchases. Regarding the sell off post-earnings, I think investors were disappointed with more idle time than expected, including 7G Valiant which is in a more stable US GoM but there's apparently very little new work in US GoM for 2025 -- 2026 visibility is better in US GoM so lower risk on delays compared to rest of the world. 7G Voyager to stay idle for 2025 but its a good candidate for some specific work commencing in 2026 IMO. Thanks for reading.
Unfortunately true about the haunted house when oil sentiment is poor, although this industry is in meaningfully better shape than it was in the last downturn. Newbuild orderbook is exceptionally low and will remain as such. Thanks for reading.
The SpareBank conference is public info (available online) so free to share. They did a great job arranging it with CEO's of three very different offshore drilling companies exposed to their own unique supply/demand trends.
"fundamental" analysis in the commodity space, whether it's oil, PMs, etc. always has the same vibe: very high conviction opinions by what seems to the outsider as very knowledgeable sources, such as CEOs, etc. that somehow never translates into actual profits in the bank for the hapless equity investor unwise enough to be using it as the basis for trade decisions. In the rear-view mirror, it almost always feels like some variation of three-card monty.
Offshore equity returns have been hideous this year, despite assurances of new cycles, new finds, new tech, etc. For me, the ONLY play that has any chance is their debt, which seems relatively investable (fingers crossed...), producing robust income, and at least a theoretical possibility of return of principal (we'll see...).
In spite of the above, I do appreciate these updates--they are definitely better than operating completely in the dark.
Gordon, thanks for the well-reasoned feedback. It's a challenging industry that's a derivative of a volatile commodity although I do think sustainable shareholder returns are on the horizon in future years but admit that is a speculative view as of March 2025.
Agree with you on the debt. My background is in credit and I plan more coverage of fixed income. Jackup vs Deepwater credit views are next up. Thank you for your interest.
Great to hear about an upcoming credit piece—some of those bonds are more exciting than a barrel of monkeys!
Tommy, thanks as always for your analysis! I'm definitely looking forward to the credit analysis, especially as it relates to BORR. On a related note, is there a general rule of thumb that can be applied for the per day or annual cost of warm stacking a JU rig? This will help me determine how many rigs in BORRs fleet need to be deployed at 150k/d to meet their interest & debt amortization payments. Thanks!
Good question and thanks for continuing to read. Not easy to pinpoint warm stack JU costs. It depends on various factors (i.e. region, rig type) but I generally assume $40-$45k/day. If anyone out there disagrees, I am all ears. I believe Borr is close to $150k/day for 2025 but I expect lower rates when filling up current availability for 2026.
My only data point is a recent BORR presentation, I think from Q3 24 earnings.... They had $59k/d In OPEX for an active rig, so I wasn't sure how much less it would be to maintain a warm stacked rig.
Also, regarding rates and utilization for '26... I posted this on X recently and am including it here in case it sparks additional dialogue on ST:
"What I can't reconcile: global oil demand steady & inventories drawing from a low-ish level. At these prices, offshore barrels more profitable than others. So... isn't contracting just a matter of time? If not, where will the barrels come from? What am I missing?"
Again, thanks for the posts and Intel!
There is a huge gap b/w floater vs JU stacking costs
Thanks for sharing, legend! I must ask on the shallow water / oil sensivitiy point - why is deepwater CapEx not more sensitive than shallow water? Does the oil not price not have a bigger hit on deepwater NPV given the longer payback period on CapEx?
Thanks for reading. Will cover this in greater detail next article on Saturday AM but jackup demand was meaningfully impacted by Saudi Aramco capacity expansion from 12 million bpd to 13 million bpd. That was shallow water jack up demand. Saudi rig suspensions put dozens of jackups back on the market bc Saudi didn’t need to build its capacity bc existing spare capacity.
At what price does Saudi begin to grow their spare capacity? That’s when jackup demand increases like it did in 2023 but I don’t expect to see that until Brent is comfortably above $85. 7G drillships come on line with multi year contracts before that IMO
Tommy & everybody,
Based on VAL reports, it seems that hot stacking costs are much lower than $30M/rig, as of all their stacking "EBITDAR" is around $50M/year.
Any insights?
Different levels of stacking costs but it’s been publicly stated warm ~$50-60k day on floaters recently by either Noble or Valaris.
Thanks Tommy. Great piece, as always. Cheers John.
The Noble sell-off post-earnings absolutely boggles my mind. Mid point of their 2025 guidance should result in >8% FCF yield (at current price) as you say, with most of that contracted. Sure there debt is a bit higher than for example Valaris but their FCF outlook for this year is also significantly higher.
You have to be really bearish on '26 and beyond to think this is close to fair value. Insiders seem to agree as there has been some buying which is nice to see.
Also despite the high dividend NE '27 leaps seem quite interesting.
The dividend yield pays investors to wait and I agree its good to see insider purchases. Regarding the sell off post-earnings, I think investors were disappointed with more idle time than expected, including 7G Valiant which is in a more stable US GoM but there's apparently very little new work in US GoM for 2025 -- 2026 visibility is better in US GoM so lower risk on delays compared to rest of the world. 7G Voyager to stay idle for 2025 but its a good candidate for some specific work commencing in 2026 IMO. Thanks for reading.
Thanks for the clarity and the SpareBank commentary. Investing in deepwater is at times as relaxing as a stroll through a haunted house.
Unfortunately true about the haunted house when oil sentiment is poor, although this industry is in meaningfully better shape than it was in the last downturn. Newbuild orderbook is exceptionally low and will remain as such. Thanks for reading.
The SpareBank conference is public info (available online) so free to share. They did a great job arranging it with CEO's of three very different offshore drilling companies exposed to their own unique supply/demand trends.