certainly makes one think but I really must believe that the deepwater is not going to turn down where newer generation drillships and semis go into warm stack status. The old crap though is likely on borrowed time.
By Reuters On February 6, 2014
OSLO, Feb 6 (Reuters) – Drillers face a year of pain as they take delivery of a slew of new vessels ordered during boom times just as oil companies ruthlessly tighten spending on offshore exploration.
Global offshore oil rig rates, already down sharply from record highs last year, could fall as much as 15 percent in some segments and firms with smaller and older fleets could be hurt the most, analysts and executives said.
Drilling stocks are already down by 20 percent since late last year but analysts at Barclays estimate that there is another 35 percent downside, even under a base case.
“It going to be a more challenging market for the next 12-18 months because you have several rigs coming into this market or rolling off contracts,” Rune Magnus Lundetrae, the Chief Financial Officer of Seadrill, the world’s biggest driller by market capitalisation, told Reuters.
“Rates are likely to drop, but with a widening spread in day rates between older and newer equipment… and there is likely to be more idling for older rigs,” he added.
Although oil and gas investments are seen rising around 5-6 percent next year, the biggest offshore players could tighten their belts the most.
Shell and Chevron have both said they would reduce their capital spending this year while BP said it expected broadly flat investments.
“The market has slowed down: drilling in Brazil has slacked off, Gulf of Mexico has slacked off,” Bjoernar Iversen, the CEO of driller Songa Offshore, said. “You see oil firms like Statoil saying that they are cutting costs, letting people go and focusing more on capital discipline.”
Market sentiment took a turn for the worse when Noble Corp , one of the biggest offshore drillers, warned that there was simply too much capacity in the market and modern rigs could push older ones out of the market.
“Campaigns are being delayed and oil companies are not willing to explore, especially the supermajors and to a lesser degree ONGC, Pemex, and Saudi Aramco,” Baard Rosef, an analyst at Pareto Securities said.
There are some 87 ultradeep water rigs on order, mostly with Korean yards like Daewoo, Samsung Heavy Industries and Hyundai Heavy Industries, with each worth roughly $600 million.
This orderbook equals nearly two-thirds of the existing global fleet and about 60 percent of these will be delivered over the next two years.
“We didn’t see any fixture in the market for several months and a few large exploration campaigns in West Africa have been pushed out in time so there is an oversupply in the market, which has become evident through Noble’s comments,” Rosef said.
Rates in the ultradeep market, the most lucrative segment, peaked close to $625,000 a day last year but are down to around $575,000 per day this year for the so-called 6th generation rigs. Barclays sees the rate falling to $475,000 while Pareto and Nordea see it coming down to $525,000 per day.
“A combination of high fleet growth, drilling campaign deferrals in key areas and increased capital discipline from oil majors have created oversupply in the floater market for 2014 and 2015,” Nordea, a key lender to the sector, said. “This has shifted the bargaining power to oil companies after a decade with drilling companies in the driving seat.”
Given asset quality, order backlogs and newbuild contracts, analysts said firms like Transocean may be the most vulnerable as it has an old fleet and has 38 floating rigs coming off contract over the next two years. Nobel and Diamond may also underperform, analysts said.
“There are many firms out there who have built speculative rigs (with no firm contract) and many also need to renew their fleet. They will be hit,” Songa’s Iversen said.
Seadrill is among the better placed firms as it has one of the newest fleets with a huge backlog and plenty of high specification newbuilds that will be in demand. However, the stock’s upside may be limited as it is already trading over 11 times its expected 2014 earnings, above the sector’s average just below 10.
Other potential winners include Ocean Rig, Odfjell Drilling , and Pacific Drilling, analysts said.
Firms operating in ultraharsh environments off Norway, Russia and the UK may be in the best position because of high utilisation rates and limited supply growth. Firms operating jack-up rigs in shallow waters are also relatively protected as oversupply is not as acute.
“The medium to long term fundamentals are still very much there however. The world needs more drilling rigs and we need more offshore production to maintain or increase global oil production,” Seadrill’s Lundetrae said.