Fitch: Drilling downturn might prompt some consolidation

A cyclical downturn in offshore drilling might provide an opportunity for driller contractors having financial flexibility to buy their peers at favorable prices, Fitch Ratings of Chicago said in a recent research note, adding that master limited partnerships (MLPs) in particular can provide financial flexibility.

“Near-term offshore demand has moderated,” Fitch said in a recent report, estimating newbuild rigs scheduled for delivery through Dec. 31, 2018, will equal about one third of the working worldwide rig fleet.

“This has led to contracting delays, and it will also probably result in shorter-contract terms and lower dayrates over the near-term,” the credit ratings agency said.

Meanwhile, drillers might consider buying assets rather than investing in new rigs as they seek to improve asset quality and gain market share. More consolidation among offshore drilling contractors also could improve pricing power and, if necessary, a more orderly fleet attrition process, Fitch said.

A corporate parent using an affiliated MLP can fund an acquisition through dropdown proceeds. MLPs also can enable contractors to purchase peers directly at tax-advantaged multiples, Fitch said.

“Both options provide further acquisition advantages to corporate drillers with an affiliated MLP. In either case, parent-driller stakeholders would directly (via a corporate acquisition) or indirectly (via an MLP acquisition) improve asset quality and cash flow prospects,” Fitch said.

Affiliated MLP stakeholders would realize additional asset and cash flow growth.

Contact Paula Dittrick at paulad@ogjonline.com.

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