With the growth in offshore oil and gas exploration, especially in Asia and Latin America, there are attractive investment opportunities in the oil well drilling sector. Specifically, ordering new jack-up rigs from shipyards and selling them to offshore drilling companies 2 years later can generate high returns. Jack-up rigs are in high demand due to new regulations requiring upgraded designs after the 2010 BP oil spill. With utilisation rates near 100% and an ageing fleet globally, drillers need new rigs but have not been placing speculative orders, opening up chances for alternative investors.
High utilization rates and ageing fleet drives demand for new jack-up rigs
The documents outline that currently there are only 157 post-1990, 300 feet+ jack-up rigs globally, with 155 contracted and 99% utilization. This is exceptionally high compared to only 60% utilization across all rigs. Additionally, 27 old rigs were already scrapped in 2011-2012 and more will likely follow. With so few modern rigs available and continued growth offshore, especially in Asia and Latin America, demand is set to rise further over the next 2-3 years.
New regulations incentivize upgrading to latest designs
After the 2010 BP oil spill, regulations were tightened worldwide around offshore drilling safety and environmental impact. As a result, the latest jack-up rigs designs are highly preferred to meet these new standards. The documents estimate that 65% of current operational rigs are pre-1990, so there is a strong need to upgrade the fleet.
Oil drilling companies not placing speculative orders
The business of offshore drilling involves the oil companies, drilling contractors, and rig operators. With cash flow issues after the financial crisis, demand was low until 2012. Drillers used to speculatively order rigs, but have not done so for years as of October 2013. This opens up the opportunity for alternative investors to order rigs and sell to drillers needing upgraded capacity when oil exploration activity rises.
Ordering jack-up rigs can generate high returns with manageable risks
As outlined, ordering a $200 million new 350 foot jack-up rig requires 10% down payment. In 2 years when delivered, it can likely sell to a driller for $215-250 million. Even with conservative assumptions, this can generate a 32% IRR and 1.75x multiple. Key risks include an oil price plunge reducing drilling activity, major driller bankruptcies, excess shipyard capacity enabling speculative orders again, and inability to secure a buyer.
Investing in new jack-up rig orders and selling them to offshore drillers in 2 years provides attractive returns due to current market dynamics. With strong demand but no speculative orders, alternative investors can capitalize on the opportunity through careful analysis of rig specifications, buyer demand, competitive dynamics, and financial modeling.