More drillers going deepwater

NEW ORLEANS (Reuters) - Rig contractors are finding the allure of deepwater oil and gas drilling harder to resist in the current slump, given that deepwater's longer lead times and massive budgets promise them smoother income flows.

Experts say drilling to unprecedented depths is part of a natural industry progression as shallower oilfields inevitably dry up. But plans for big spending on deepwater, particularly in Brazil, have concentrated minds among drilling executives.

Matt Ralls, chief executive of Rowan Cos (RDC.N), said its plan to get into deepwater was just good business and not necessarily implying a negative view about the long-term prospects for its existing rigs.

"Our interest in doing it is because we want that diversification in our fleet," said Ralls, who joined Rowan this year, having previously been chief operating officer at GlobalSantaFe, an offshore firm bought by Transocean in 2007.

Ralls, speaking to Reuters on the sidelines of this week's Howard Weil Energy Conference in New Orleans, said the eventual sale of Rowan's equipment manufacturing arm might provide funds for a deepwater acquisition.

"That could be one piece of it," he added.

Pride International (PDE.N) is going a step further, with plans to spin off its Gulf of Mexico fleet of jackup rigs by the middle of this year. While this has been in the works for some time, the move reflects where investors see value.

Right now, investors are worried by steadily falling rates for jackups -- which, as the name suggests, stand on legs on the sea floor and therefore only operate in shallower waters.

Deepwater "floaters" -- high-tech vessels that cost half-a- billion dollars to build -- command higher and steadier rates and companies behind them are now favoured by investors.

Shares of Pride and Diamond Offshore Inc (DO.N), a leading deep water driller, trade at forward price-earnings ratios of about seven, compared with less than five for big offshore rivals.

A glance at Brazil shows why deepwater prospects look so strong. The country's energy minister said last week it needed $270 billion (185.3 billion pounds) in investment over the next decade to develop massive new deepwater oil reserves.

Earlier this month, Goldman Sachs repeated its outperform view on deepwater-focused drillers and raised price targets on Transocean (RIG.N), the world's largest offshore rig contractor, Noble (NE.N) and Pride.

Goldman was less confident about the outlook for Rowan and Ensco International (ESV.N) with jackup demand so weak and a wave of newbuilds due to be delivered in the next two years.

"Spot demand for international jackups and midwater floaters appears to be nonexistent at almost any price, given that very few rigs that roll off contract are being re-signed," Goldman analysts wrote in a research note.

LONG VIEW

Wary of this, Ensco will spend another $1.7 billion by 2012 in a $3 billion program to build seven ultra-deepwater rigs. The first of those is due to start operating next month.

"We expect the revenue contribution from our deepwater fleet to more than triple in 2009 to just over $300 million," Chief Executive Daniel Rabun said on a recent conference call. "The earnings from our growing deepwater investment should serve as a buffer to the weakness in the jackup markets."

Because of the inherent challenges of deepwater drilling, the contracts run far longer -- a point clearly demonstrated by Noble Corp at the Howard Weil conference.

Chief Executive David Williams talked of how comforted he was by Noble's $11 billion backlog of work stretching out to 2016. Nearly a third of that comes after 2011, entirely made up of deepwater contracts.

He said Noble remained in the market to buy rigs off struggling rivals.

"The lower it goes, the uglier it's going to get and the more opportunities we'll see," Williams said.

But he added he would only be tempted if he could find better value than the $540 million it cost to build its Globetrotter rig -- which drills as deep as 40,000 feet (12,000 m) in up to 10,000 feet of water.

Financing deepwater drilling is not the only challenge. You also need to get crew to and from them. This was evident in the presentation by Bristow Group (BRS.N), which discussed its $1 billion investment in new helicopters capable of ferrying drillers safely for longer distances and in tougher weather.

(Reporting by Braden Reddall; Editing by Andre Grenon)