what I want to know is why has nobody gone belly up yet?
By G. Allen Brooks on February 28, 2017
Stacked PSVs in Louisiana, August 2016. Ken Hocke photo.
Hornbeck Offshore CEO Todd Hornbeck recently described his company’s weak quarterly earnings as a reflection of the poor state of the offshore vessel market.
“We are caught in a situation with a massively oversupplied market of OSVs for current market conditions based on the continuing decline in deepwater drilling activities,” Hornbeck said in a Feb. 16 earnings call. “At present, we see no signs that these conditions will change any time soon.”
The statement was no surprise, as the offshore drilling market has been one of the most distressed sectors of the oilfield service industry due to its high operating costs and poor demand in a climate of low oil prices.
The question for offshore service companies and offshore drilling operators is simple: What will it take for the outlook to change?
Hornbeck’s answer to that question seems to depend on how you define change.
“Earlier in this cycle, the industry mantra was ‘lower for longer,’” Hornbeck said. “The message we have recently been hearing from our customers, almost uniformly, is that they now see oil prices as ‘lower forever.’ They no longer view this as a U-shape recovery, but an L-shaped recovery, or so we’re told.”
If offshore operators truly believe they will not experience higher oil prices in the future, then taking steps to reduce operating and capital costs is the only path to higher levels of activity down the road. Attacking high costs offshore requires a number of adjustments by both operators and service companies.
So far, service companies have borne the brunt of the cost reductions required as a result of oil prices falling from $100 a barrel. To achieve cost reductions, drilling contractors and service companies laid off employees, idled equipment, cut salaries and slashed prices. The net result has left the contracting and service industry deeply in debt and nearly bankrupt.
While the service business can operate for a brief period in such a perilous state, doing so for any duration means the destruction of the supply chain for the offshore business. Producers will need to make more substantial cuts on their side of the operating cost equation. At the same time, contractors and service companies need to reassess the make-up of their industry. Recapitalizations of service companies — eliminating debt in favor of nearly 100% equity financing — will be necessary. Another step will be consolidations that enable surviving companies to control more assets with less overhead.
Todd Hornbeck made his pitch during the call: “Smart acquisitions can achieve those objectives in the OSV space, given the high operating risk and capital-intensive nature of this business. And for this industry, such acquisitions are necessary.”
Will there be follow through? If so, the structure of the offshore drilling and service industry will look very different in a few years.