Diamond’s BlackRhino Takes Low Rate Amid Deep-Water Rig Glut

Jul 24, 2014 4:21 pm ET

(Updates with closing share price in eighth paragraph.)

July 24 (Bloomberg) -- A glut of deep-water drilling rigs is dragging down share prices and threatening revenue for operators that are being forced to accept lower day rates.

The latest sign is the Ocean BlackRhino, one of Diamond Offshore Drilling Inc.’s most expensive new ships, which steamed out of the shipyard this year and took over an existing contract instead of starting a new job for the Houston-based company.

Rig contractors responded to rising demand in the past few years with the biggest batch of construction orders since the advent of deep-water drilling in the 1970s. Almost 100 vessels are on order for delivery before the end of 2017, according to IHS Energy. That’s more than the industry needs now.

“We feel the market is likely to have an over-supply of rigs throughout 2015 and into 2016,” Chief Executive Officer Marc Edwards told analysts and investors today on a conference call.

The BlackRhino is displacing its 13-year-old sister rig, Ocean Confidence, according to a monthly fleet-status report filed yesterday after the market closed. The contract has a $550,000 day rate and can be converted to a three-year deal with a $485,000 day rate.

“The transfer of this backlog suggests that the BlackRhino could not secure its own contract,” J.B. Lowe, an analyst at Cowen & Co., wrote today in a note to investors. “It serves as a reminder that the trend in ultra-deepwater day rates remains firmly down.”

If converted to the three-year term, the rate would be lower than some recent three-year contracts that ranged from $550,000 to $600,000 a day, he wrote. Two years ago, Ole Slorer, an analyst at Morgan Stanley, projected rates for ultra- deepwater rigs, which can drill in water more than two miles deep, climbing to as much as $714,000 that year.

Diamond Offshore fell 4.3 percent to $47.87 at the close in New York, the most since Jan. 23.

The company is the worst performer this year among drillers in the Standard & Poor’s 500 Index. Five of the seven members of the S&P’s drilling subindex work offshore and have dropped an average of 12.5 percent this year, while the two land-based rig contractors have climbed an average of 56 percent.

Contractors are now dealing with the double blow of an oversupply of rigs and lower spending by customers, Steven Newman, chief executive officer at Transocean Ltd., owner of the world’s largest offshore rig fleet, said last month in an interview at Bloomberg’s Houston office.

While spending by explorers and producers is expected to reach a record $682 billion in 2014, it’s growing at a slower pace than in recent years, according to Barclays Plc.