Rising day rates, utilisation drive rosier outlook for OSVs

Rising demand for offshore drilling rigs and OSVs is putting upward pressure on day rates and utilisation, providing a fundamentally stronger outlook for the sector.

Ultra-deepwater rig day rates and utilisation are increasing, with the number of floaters committed exceeding levels from six years ago and rates averaging more than US$330,000 per day and climbing in 2022.

As of August 2022, 142 floaters — semi-submersibles, drillships and other self-propelled vessels designed for production and drilling — have been committed, up 19% year-on-year from 119 units, according to data shared by drilling contractor Diamond Offshore with investors in September.

While offshore E&P capex has been relatively flat year-on-year, forecasts by Rystad Energy project substantial upticks in 2023 and 2024. Offshore E&P capex will rise from US$83Bn in 2022 to US$142Bn in 2023 and US$144Bn in 2024.

During week 41 of 2022, Aquadrill’s sixth-generation UDW drillship Vela (ex West Vela) was chartered by Woodside to drill the Hoodoo prospect in the East Breaks Block 699 in 950 m of water the US Gulf of Mexico. Managed by Diamond Offshore, during the charter which will end in December 2022, Vela will drill one well, with an option for one more for Woodside. It will then go on a charter of a minimum of 225 days with BOE Exploration & Production in the GoM, from Q1 to Q3 2023. The contract also includes options for an additional five to seven wells.

“Average day rates for Transocean’s UDW drilling fleet will rise from US$332,000 to US$401,000”

Rising day rates and demand for UDW drillships are evident in contracts highlighted by the Swiss drilling contractor in its most recent fleet status report. These include three contracts for UDW drillships in the US Gulf of Mexico, one two-year contract for Deepwater Conqueror at US$440,000 per day starting in March 2023 for an undisclosed party, and two for Deepwater Asgard, including a one-well contract with a one-well option from Murphy Oil at US$395,000 and another one-year contract at US$440,000 per day, commencing in March 2023 for an undisclosed party.

In Brazil, Transocean’s UDW drillship Petrobras 10000 was awarded a 5.8-year contract at US$399,000 per day, escalating annually to US$462,000 per day.

Based on current fixtures, average day rates for Transocean’s UDW drilling fleet will rise from US$332,000 in Q4 2022 to US$401,000 in Q3 2023.

Rising OSV rates and utilisation

The supply of both jack-ups and floaters is clearly tightening. Shipbroker Lorentzen & Co reported jack-up drilling rig utilisation is up 8% year-on-year to 86%, and floater utilisation up 11% hitting 84%. This increased E&P activity is resulting in increased demand and improving day rates for OSVs across multiple regions. Lorentzen & Co said this year, OSV rates globally have increased approximately 20%, and the subsea sector is also approximately at 82% utilisation, the best since the 2014 downturn.

In reporting their Q2 2022 results, OSV owners noted jumps in average vessel utilisation and day rates. Leading OSV owner Tidewater reported average vessel utilisation for its global fleet of 76% for Q2 2022, a 19% jump year-on-year, while SEACOR Marine noted its average vessel utilisation was 77% for Q2 2022, up from 67% for the same period a year earlier. Both US OSV owners reported positive moves for average vessel day rates; Tidewater’s rose to US$12,544 in Q2 2022, up from US$10,435 in Q2 2021, while SEACOR Marine’s was up incrementally to US$12,149 from US$12,007 for the same period. Table 1 shows the increase in average vessel utilisation rates reported during Q2 2022 by a sampling of publicly traded OSV owners.

But while rates and utilisation have risen, they are not yet at the levels that would justify ordering newbuilds. Complicating the picture are available financing, a volatile energy sector and the higher costs associated with future proofing a newbuild OSV. This will keep a lid on newbuild activity and vessel supply tight.

“Day rates in southeast Asia have increased about 25% since the start of 2022”

Fearnleys sees a “fundamentally strong outlook for the industry”, in its latest Fearnleys Offshore Supply Market Report, where the shipbrokers writes: “We expect 28 FPSO awards globally in the coming two years, representing a 47% increase from the previous two years, while Western governments are competing to increase offshore wind capacity targets in the coming decades.

“Combining this with the somewhat fixed vessel supply, we believe the forward-looking market balance remains favorable for vessel owners in most segments. Energy security remains a key priority going forwards, which is unlikely to change in the coming years given today’s critical situation and the lack of feasible alternative solutions.”

On a regional basis, Fearnleys notes, “day rate and utilisation averages continued their slow and steady upwards trajectory during September” in the southeast Asia OSV sector, driven by new drilling campaigns and tightening vessel availability. Day rates in southeast Asia have increased about 25% since the start of 2022.

Based on its forecasts, Fearnleys foresees levels remaining steady in the next few months “before taking off next year.”

The shipbroker is positive about the Middle East, too, where day rates have risen by 15% since the start of the year and utilisation now exceeds 80%.

“Taking account for the upcoming vessel demand, in light of recent and ongoing requirements from NOCs in the region and E&P activity in the pipeline, the market is looking much rosier,” writes Fearnleys. Brazil and West Africa are viewed as “hot spots” for quality tonnage.