More Drillships on the Way

Last week, Noble Energy (NYS: NBL) announced it is plunking down $630 million for a new ultra-deepwater drillship. This is the fourth drillship order this year for the small Houston-based oil and outfit. Noble isn't alone with these purchases; at least three other energy companies have made significant purchases in 2011 to increase their fleets.

Transocean (NYS: RIG)
Transocean is one of the biggest offshore drilling contractors, and last month it put in a bid to become that much bigger. The company bid $1.43 billion for Norway-based Aker Drilling. If the deal closes, Transocean gains two ultra deepwater rigs and two more being built as we speak.

Seadrill (NAS: SDRL)
Seadrill ordered two ships from Samsung at the end of last year. Apparently, that was not enough, and the company has placed another order with the shipyard in South Korea for an ultra-deepwater dual derrick drillship for $600 million. The ship is scheduled to be delivered in the third quarter of 2013.

DryShips (NAS: DRYS)
The Samsung yard is also building a new ultra-deepwater drillship for DryShips subsidiary Ocean Rig. This rig will cost DryShips $608 million and is the third drillship order this year. All told, DryShips is expecting four ultra deepwater drillships to be delivered between now and 2013, tripling its capacity.

Not all oil and roses
Expanding too fast can be risky for a company and damning for an industry. While there is a significant period of time between placing an order and getting the ship delivered, we could see the market flooded with drillships in 2013 in the same way that the dry bulk shipping market is currently suffering from the oversupply of dry ships.

Additionally, Transocean was downgraded by Fitch after its bid for Aker Drilling. Aside from potential lingering litigation issues from the Macondo well blowout, the rating agency attributed the downgrade to an increase in net debt and a decrease in liquidity. Transocean will assume $800 million in debt from Aker, bringing its gross balance sheet net debt to $12 billion. This is another risk to consider when companies place large orders or bids for acquisitions.

Foolish bottom line
Going forward, it will be important to monitor how many of these drillships come online at the same time and how that affects demand in the industry. It's also important to keep in mind this year of huge capital expenditures when evaluating cash flows for the companies mentioned above.

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