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With oil prices soaring, the major energy outfits are willing to spend big bucks searching for new sources of supply in deep waters.

The daily rate that operators pay to rent a high-end, deep-water drilling rig is $500,000 to $550,000. That’s up from a day rate of $450,000 to $500,000 a year ago.

“These companies are spending $1 million every two days to rent these rigs,” said Dan Pickering, director of research at Tudor, Pickering, Holt & Co., an energy investment and merchant banking boutique. “That’s a lot of dough.”

As oil prices surged to record levels, major players have the incentive and the means to invest in deep-water drilling.

Move To Deep Water

The push into deep water comes as the oil and gas companies are having a tougher time winning projects around the world in places like Russia and Malaysia than a year or two ago, says Pickering.

At the same time, players are better at identifying and successfully producing in high-water depths.

Offshore drilling contractor Noble Corp. () is cashing in. The company performs contract drilling services with a fleet of 62 mobile offshore rigs. Most are deployed overseas in the Middle East, the North Sea, Brazil and West Africa.

Its fleet includes 43 self-elevating mobile offshore drilling platforms, or jack-up rigs, which can drill in water 150 to 400 feet deep.

It has 16 deep-water floating rigs, which can drill in water up to 10,000 feet deep.

Executives weren’t available for comment, but its fastest-growing area is the market for deep-water rigs that drill in depths of 5,000 feet or more, says Pickering.

Overall, industrywide demand for deep-water rigs is high amid tight supply.

According to industry data, the 42 deep-water rigs under construction and slated for delivery in 2008 and 2009 are all under contract, William Hoffman, Noble’s vice president of marketing, said in a conference call.

For its part, Noble has only three deep-water rigs available before Jan. 1, 2010.

“The market for deep-water drilling rigs globally is undersupplied, which leads to significant pricing power of deep-water assets,” said analyst Kurt Hallead of RBC Capital Markets.

In the first quarter, the average day rate for Noble’s deep-water rigs that drill in water depths of over 6,000 feet rose 12% from the prior year to $291,924 per day.

Since Noble has some contracts inked in 2003 and 2004, the first quarter’s average day rate includes rates that are much lower than current levels, where deep-water rigs are being contracted for $500,000 a day or more, says Pickering.

For instance, in the first quarter, one of Noble’s deep-water rigs received a two-year contract from Shell () at a day rate of $505,000. The contract starts in 2009.

Like many of its peers in the booming energy sector, Noble has seen strong growth.

Earnings climbed for nine straight quarters by at least 54%, and sales by at least 33%.

“Noble is in the right place at the right time with the right assets,” said Pickering.

Noble has a fleet of rigs capable of drilling in varied water depths from 150 feet to 10,000 feet deep.

In the first quarter, earnings climbed 54% from the prior year to $1.43 a share. Sales rose 33% to $861.4 million.

Results were buoyed by increased day rates on several units and attention to cost control, said Chief Executive David Williams in a statement.

“They exceeded my expectations and the consensus,” said Hallead. “The primary differential was lower operating costs.”

The biggest driver of Noble’s better-than-expected performance was lower spending on repairs and maintenance, Chief Financial Officer Thomas Mitchell said in a conference call.

Noble stands to get a nice boost from its growing backlog. During the quarter, it added almost $5 billion in potential revenue backlog.

The company has commitments on eight deep-water rigs for multiyear terms, starting as late as 2010.

In March, Noble said it received a memorandum of understanding for contracts on five deep-water rigs currently in Brazil.

The soft spot is the jack-up market, where pricing has been weak, says Hallead. The day rate for jack-up rigs operating outside the Gulf of Mexico has slipped to $130,000 to $174,000 per day from $160,000 to $200,000 a year ago, he says.

Jack-Up Rates

Hallead says day rates for renting jack-up rigs have come down because there’s been a big increase of new jack-up rigs delivered to the market that have no specific contract.

“The customer is willing to wait and is in no rush to start a drilling program because they know there’s additional capacity in the market,” he said. “And they’re using that added capacity as a lever to negotiate better prices.”

Despite the softness on the jack-up side, watchers expect Noble to keep up its momentum. Analysts polled by Thomson Reuters expect earnings to rise 32% to $6.00 a share in 2008, then 19% in 2009.

“The environment for pricing for deep-water rigs looks very good, and for jack-ups it looks stable,” said Pickering. “Generally, I think the deep-water side is clearly the excitement for the company now. That’s going to be the driver of the earnings growth.”

He figures more than 60% of Noble’s 2009 earnings will stem from the deep-water side of its business.

« Gas sells out in advance of P.E.I. price increase

Islanders responded to an announced increase in the price of gas by pumping some service stations dry on Wednesday evening. A news release from the Island Regulatory and Appeals Agency went out shortly after 4 p.m. Wednesday, and word spread quickly. Gas went up six cents a litre overnight, and many Islanders rushed out to fill up on cheaper gas. “It was just chaotic,” said Michael Cahill, the assistant manager of the Shell station in Summerside. “We were taking bets...