Financial crisis, followed by repercussions from the Macondo accident, now giving way to recovery and reinvestment
During the turbulent past three years, customers of offshore drilling companies were hit with a one-two punch—the impacts of the financial crisis of 2008 to 2009, and the drilling moratorium that followed the Macondo incident, and while several of these drillers have struggled to rise up off the mat, according to an IHS report, the sector is finally starting to show signs of recovery and reinvestment. This recovery comes, in large part, thanks to rising day rates and demand for drilling in deepwater environments, notably Brazil, East and West Africa, and the Gulf of Mexico.
According to John Parry, principal energy financial analyst at IHS and author of the IHS Herold Offshore Contract Drillers Peer Group Analysis, year-over-year financial performance in 2012 indicates that a representative group of offshore drilling contractors have begun to recover from the impact of the 2008 to 2009 financial crisis, which drove down oil prices and impacted client cash flow significantly; and from the subsequent moratoriums, and drilling slowdowns that followed the 2010 Gulf of Mexico Macondo oil spill.
“This sector faced a perfect storm, and investors did not take kindly to this sequence of events, as witnessed by the stock market collapse of offshore driller equities,” said Parry. “The recovery has been agonizingly slow, particularly for Transocean, whose rig was involved in the Macondo incident, and for Diamond Offshore Drilling, which has the oldest fleet among the major offshore drillers and the fewest new rigs under construction, but, it is a recovery, and we started to see a reversal of fortune for this sector in the first half of 2012. Significant earnings gains appear likely for the sector in 2013 and 2014, as energy company clients appear willing to pay higher day rates, particularly for newer, more sophisticated offshore rigs.”
Parry adds that the post-Macondo concerns, which dampened offshore drilling particularly in the U.S. Gulf of Mexico in 2011, have eased. In addition, offshore drillers are continuing a major reinvestment cycle to replace their aging jack-up fleets, while also adding more sophisticated floating rigs for deepwater and harsher environments.
Worldwide utilization of jack-up rigs was the highest in more than two years at mid-year 2012. According to IHS Petrodata, there were 474 jack-ups worldwide, with demand about 384. Total utilization of all jack-up rigs was approximately 80 percent, but the effective utilization of all rigs actually being market ready was a higher 92 percent. Add to that the fact that in the first half of 2012, 22 announcements were made regarding discoveries in water depths of 4,000 feet or deeper. These discoveries were made in 10 different countries at an average water depth of 6,400 feet, with the deepest being 7,400 feet offshore Mozambique. According to Parry, these statistics are buoying the outlook of these drillers, who expect a continued uptick in deepwater activity and rig demand.
Both Ensco and Noble Corporation have been upgrading their respective fleets and appear to hold a relative competitive advantage, aided by their rising exposure to the deepwater and ultra deepwater markets, where clients have had recent exploration success. Rowan Companies, a major player in the premium jack-up market, has undergone a major restructuring, shedding long-held manufacturing and land-rig assets and reinvesting the proceeds in the deepwater market.
“In general, Ensco and Noble Corporation, thanks to their rising population of newer rigs, are having the strongest margin recovery in 2012,” said Parry. “Of course, operating EBITDA margins also reflect fleet mix and prior contract terms, as well as current rising costs and impacts from the changing compliance environment. Consequently, it may require more time to measure the true extent of the recovery by offshore drillers.”