The offshore drilling industry will remain under severe distress through 2017, predicts Moody’s Investors Service.
Most troubling for the industry is overcapacity, as the number of idle rigs climbs despite delivery deferrals and retirements and as newbuild deliveries loom over the market.
“Drillers will increasingly contend with diminished backlogs, rig values, fleet sizes, and margins if oil prices do not bounce back to the $70-80/bbl range, which we believe could support an increase in shallow-water as well as deepwater and ultradeepwater drilling,” writes Moody’s in an industry report. The firm expects crude oil prices to remain volatile and to “rise minimally” through 2017. “Even if rig demand stabilizes, persistent excess capacity will likely keep day rates low for several more years.”
Average day rates have fallen by more than 35% for new-generation floating rigs from a cyclical peak early in 2014 and by more than 25% for jack ups.
Rig utilization dropped by about 10% between mid-2014 and mid-2015. Global utilization is approaching 80% for jack ups and floaters.
“These declines occurred even as the number of active and marketed rigs shrunk by about 5% globally,” Moody’s says.
Oversupply to linger
Construction schedules indicate no quick relief from the global oversupply of rigs, Moody’s says.
Citing IHS-ODS Petrodata, the firm says 72 floaters and 117 jack ups were under construction in July. Due for delivery through 2017 were 75% of the floaters and 93% of the jack ups, yet only about half the floaters and less than 10% of the jack ups had contracts in July.
Between mid-2014 and mid-2015, the number of jack ups with contracts fell by 13%, and the number of floating units with contracts fell by 18%.
“With so many newbuilds on the horizon,” Moody’s says, “rig companies will have to cold-stack or scrap substantially more rigs over the next several years.”
Keeping the utilization rate near 80% implies removal of 20-25% of the active and marketed offshore fleet.
Noting that floater demand was sagging in early 2014 when the oil price remained near $100/bbl, Moody’s says a revival in deepwater and ultradeepwater drilling is unlikely through 2017. The market segment suffers from further financial stress and a corruption scandal at Petrobras, the world’s largest user of floaters.
Because of oversupply, day rates for floaters will fall more in this oil-price slump than they did in the 2009 downturn, when floaters were in short supply.
Jack up day rates also will plunge because of rapid growth in capacity, according to Moody’s.
The firm expects drilling to fall further in 2016, especially in high-cost areas, as drilling firms complete current contracts.
Baker Hughes Inc. rig counts between November 2014 and August 2015 fell by 46% in Africa, 39% in the US Gulf of Mexico, 36% in Latin America, 17% in the North Sea, 16% in Asia-Pacific, and 15% in Europe. The Middle East rig count increased by 16% during the period, while total international activity was down 17%.
“Oil and gas producers are still cutting rig exposure to preserve liquidity and will defer most exploration and appraisal drilling as well as high-cost early-stage development projects at current oil prices as they reassess project economics, development timing, and long-term strategies,” Moody’s says. “Without a significant, sustained recovery in oil prices, it could be difficult for oil companies to maintain even today’s reduced drilling levels through 2017.”