Fitch: Deepwater drilling suspension to jolt rig owners

By OGJ editors
HOUSTON, May 31 – Rig owners face financial jolts and business adjustments after the shutdown of deepwater drilling in response to the Apr. 20 Transocean Deepwater Horizon tragedy and continuing oil spill.

US President Barack Obama on May 27 suspended drilling on 33 deepwater wells in the Gulf of Mexico, extended by 6 months a moratorium on issuance of deepwater drilling permits, and canceled two Outer Continental Shelf lease sales.

A 1-month suspension of deepwater drilling would lower earnings before income tax, depreciation, and amortization (EBITDA) of six rig owners by a total of $198.3-354.6 million, according to an early analysis by Fitch Ratings. EBITDA is an accounting calculation used by financial analysts to compare the profitabilities of companies and industries.

If deepwater drilling were suspended for 6 months, the estimated EBITDA reduction would be $2.052-3.723 billion, Fitch estimates.

Drilling contractors in the analysis are Diamond Offshore, Ensco, Noble Corp., Pride International, Seadrill Ltd., and Transocean.

The lower values in both ranges result from the application of a fleetwide EBITDA margin to lost revenue. Fitch, however, believes costs will remain high because uncertainty of duration of the suspension will keep contractors from releasing crew members.

“As a result, the amount of the lost revenue will translate on a dollar-for-dollar basis to lost EBITDA/cash flows,” Fitch says. “This could result in a more significant impact on the financial well-being of those drilling rig owners in the deepwater US Gulf of Mexico.”

Estimates tentative
Fitch analysts Adam M. Miller, Sean T. Sexton, and Mark Sadeghian stressed the tentative nature of financial projections made before regulatory details are available.

“There is considerable uncertainty with regard to both the ultimate length of time that the moratorium will be in place and the impacts on the existing drilling contracts due to the resulting loss of revenue from force majeure clauses being invoked,” they said.

The analysis doesn’t account for contract-termination payments that might arise or the chance that rigs will leave the Gulf of Mexico to drill at existing or lower dayrates.

The analysts point out that some rigs in the gulf were due to come off-contract “and could have potentially earned additional revenues from new long-term or spot contracts.” Their estimates don’t account for those developments.

Other potential effects not covered in the Fitch analysis are increased insurance costs, higher legal expenses resulting from litigation at Transocean and possible new contract disputes, relocation costs, higher operating expenses resulting from increased safety and regulatory testing, and loss of revenue from higher downtime.

The analysts made these individual estimates of EBITDA reductions for a 1-month deepwater drilling suspension: Diamond Offshore $36.26-58.8 million, Ensco $11.68-19.9 million, Noble $52.64-79.7 million, Pride International 0, Seadrill $7.8-14.2 million, and Transocean $89.88-182.1 million.

For 6 months of downtime, the effects would be Diamond Offshore $321.4-521.2 million, Ensco $154.54-262.9 million, Noble $517-782.3 million, Pride International $45.98-119.7 million, Seadrill $79.29-144.3 million, and Transocean $933.97 million-$1.8923 billion.

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