Operators of offshore drilling rigs again face bankruptcies—the second round in the industry in 4 years—thanks to the plunge in energy prices that likely will leave surviving drillers aligned with big oil firms.
Drillers have been devastated by the abrupt halt of exploration, as they write down billions of dollars on the value of their fleets.
The offshore services business is the worst performing of the oilfield services sector, with shares of the 10 largest publicly traded companies down 77% since the start of the year, according to a Reuters press release.
Four of the seven largest drillers—Diamond Offshore Drilling, Noble Corp., Seadrill Ltd., and Valaris—have taken steps that could lead to bankruptcy and two others have contacted creditors.
Shelf Drilling, the ninth-largest by revenue, is meeting with creditors over loan covenants that take effect in 2021. In May, Pacific Drilling said it may need to modify the terms of its debt and was seeking other funding in case creditors did not approve.
Finding new money will be difficult, said Basil Karampelas, a director at interim management and advisory firm SierraConstellation Partners.
In making decisions, bankruptcy investors evaluate companies on 13- or 26-week cash flows, Karampelas said. But for many drillers, there will be little to show. Creditors “will have to decide if they want to ante up to get past that period.”
Between 2014 and 2016, as crude fell from over $100 to $26/bbl, oil majors kept exploration alive off the coasts of Brazil, Mozambique, and in the Mediterranean, offering jobs to drillers whose contracts were cancelled.
In that downturn, drillers typically had large order backlogs and held contracts with substantial lease rates, said Jorn Madsen, CEO of Maersk Drilling.
For years, exploration was scaled back due to high costs and cheaper US shale. Then, 2 years ago, discoveries off the coasts of South America and Africa sparked new interest in deepwater projects and a boom in offshore leases.
Oil prices were expected to surge in 2020, up to at $60/bbl. But optimism soured as the pandemic crushed demand and oil prices bottomed out.
But now, oil majors are slashing their own spending 30 to 50% to preserve cash and pay dividends. Their greatest need is to get debts refinanced and simply to survive over the next 2 years.
In June, the number of floating rigs at work is expected to hit the lowest level since 1986, as oil companies cancel or defer contracts.
“Existing players and the existing structures will probably not be there as today,” said Odfjell Drilling Chief Executive Simen Lieungh, referring to companies scrapping rigs.
Offshore service firms may need to scrap up to 200 of some 800 floating rigs to regain profitable lease rates, according to David Carter Shinn, lead analyst for Bassoe Offshore.
Many oil producers are withdrawing from projects that require $60/bbl to earn a profit, and chances for this are bleak in the near term. Chevron, Exxon Mobil, Petronas, and Royal Dutch Shell ended drilling contracts early this year to save money.
Chevron said it will limit offshore work to fields that connect to existing infrastructure rather than start new exploration. Exxon, BP, Total, and Shell offered no details on their drilling plans when approached by Reuters.
Many offshore drillers are scrapping or retiring vessels, as it may be years before they are needed again. Estimating that may take 2 years, Valaris plans to scrap 11 rigs and put aside nine others.
Seadrill, which slipped into bankruptcy in 2017 after the last oil-price downturn, pioneered a model for sharing costs that might prove a path forward.
With a focus on oil fields that have long lives, the company partnered with customers including Sonangol Group and a Qatar Petroleum spinoff, offering drillers a way to lower their contract risks.
The Seadrill ventures “have delivered increased fleet utilization and incremental access to markets that are expected to show significant growth over the coming years,” spokesman Ian Cracknell said to Reuters.
“It could be one of the few options to move forward,” said William Turner, a vice president at Welligence Energy Analytics. “They are going to have to get creative to survive.”