NEW YORK - Evercore ISI has issued a report analyzing global offshore activity.
With the Brent oil price hovering below $40/bbl at the close of 2015, the outlook for the offshore-related subsectors remains challenging, the report said.
“We expect the segment to continue to underperform the US land-levered subsectors, particularly the offshore drillers,” Evercore ISI continued, noting that Shell’s early termination of Polar Pioneer brings the industry total to three for December.
The analyst firm said that, with operators taking fresh cuts to E&P budgets, it expected more early rig contract terminations to save on high spread costs, with some operators exiting expensive markets and exploration programs outright.
The report says that the pace of rig retirements will likely reaccelerate in 2016 after what the firm called a “surprisingly slow “month of rig attrition in December. Only one jackup was removed from the drilling fleet - Maersk Guardian was converted to non-drilling use. Overall, 11 jackups and 28 floaters have been retired year-to-date. A total of 77 jackups and 30 floaters are scheduled to be delivered in 2016, however, only eight and 12 have been contracted, respectively.
Although it remained cautious on offshore drillers, Evercore ISI said it believes offshore spending could pick up somewhat in the back half of 2016, but notes a material uptick in 2017 will require several quarters of oil price stability in the $60+/bbl range.
Evercore also provided an update on recent rig contracts and cancellations, starting with Shell’s most recent termination. The operator ended its contract with Transocean Ltd. for the harsh environment semisubmersible Polar Pioneer (which Evercore says operates at a rate of $624,000/d) ahead of its July 2017 expiration date. Earlier this month, Shell similarly terminated the Noble Discoverer's contract for convenience.
Both floaters had been drilling in Arctic waters offshore Alaska, which Shell abandoned in September. With the close of the BG merger imminent, Shell recently revised its combined 2016 capex to $33 billion, $2 billion lower than the previous guidance. Shell has 17 other rigs contracted (12 floaters, four jackups, 1 tender), while BG has one jackup in the Indian Ocean. Shell is also set to start-up the recently delivered Transocean newbuild Deepwater Proteus in the US Gulf of Mexico in 2Q 16.
Shell has two other Transocean newbuilds signed to long term contracts to be delivered in 2017.
Separately, Transocean announced earlier this month that Statoil also terminated the $590,000/d contract for the Discoverer Americas about five months ahead of schedule. The national oil company said that "in the current environment" it would be "unable to secure additional activity for the rig for the remainder of the contract period."
Evercore said it believes more floater early terminations are likely, as operators takes further steps to reduce costs.
“Early termination of offshore rigs eliminates high services spread costs that have not fallen as sharply as rig rates,” Evercore ISI said. “We estimate 10-20% reduction in offshore services costs, versus more than 50% cuts in rig rates. Meanwhile, offshore rigs generally contain provisions that allow the operator to terminate the contracts a bit early.”