Offshore drillers are facing a softening market with credit implications linked to asset quality and financial flexibility, according to Fitch Ratings.
The market expects mobile offshore drilling unit dayrates to exhibit weaker trends in the near-term mainly due to the timing of new-build deepwater deliveries and contract rollovers.
Jack-up rigs, on the other hand, are reportedly experiencing more dayrate resiliency.
However, Fitch points to the large delivery backlog of speculative jack-ups as a cause for concern.
Near-term demand for drilling tonnage (mostly high spec) has moderated as IOCs (international operating companies) focus on cash flows and shareholder returns and national oil companies (NOCs), particularly crisis wracked Petrobras, delay drilling programmes further depressing market conditions.
We warned in Energy last month that the market for deepwater drilling units in particular was starting to look shaky.
Fitch says the breadth and depth of the oversupply cycle remains uncertain.
The market’s dayrate outlook is varied due to the limited number of recent contract announcements.
For example, ultra-deepwater dayrate estimates are generally in the $400,000-$500,000/day range. This is way below the nearly $600,000/day rates observed over the past couple years.
“The rate of absorption could introduce downmarket competition leading to some lower specification rig displacement and, potentially, stacking,” warns Fitch.
“New builds equal to roughly one-third of the working worldwide rig fleet are scheduled to be delivered over the next few years.
This will materially increase the supply of offshore rigs and raise the average worldwide fleet quality.
As a result, utilisation and dayrates for existing, lower specification rigs will come under pressure.
Fitch reckons that drillers with higher quality assets during the oversupply cycle are likely to experience better market utilisation and dayrates than lower quality peers.
The credit rating outfit expects the most capable and efficient rigs, as well as those that employ the latest safety advancements, to command more favourable contract terms and shorter periods of stacking.
But, consistent with the general market outlook, Fitch anticipates that near-term uncontracted new-build and higher specification renewal dayrates will be considerably below rates realised over the past few years.
Fitch says that drilling contractors’ ability to retain financial flexibility will be integral to maintaining credit profiles.
This may be particularly challenging for those with large, near-term capital requirements, weaker contract coverage, higher leverage profiles, and heightened dividend programmes.
However, Fitch notes there is precedence for drillers to defer capital spending, divest assets, and/or suspend dividends in periods of sustained weakness to support operations and protect their balance sheet.
However, the agency warns that such actions may be tough to execute for legal, economic, and policy reasons during a prolonged market dislocation.
“The ability to defer capital spending on the delivery of previously ordered new-builds is limited given the contractual obligation, as well as reputational risk,” it says.
“Divestitures are being pursued by several drillers with material actions being undertaken via IPOs and/or MLPs, but these strategies are subject to heightened economic execution risk in the present market environment.
“Dividend cuts are a possibility and equity markets seem to have priced in this risk with large, established drillers yielding 5%-11%. However, there may be little willingness to do so, since many dividend programmes were recently initiated or upsized.”
Fitch adds: “In the medium to long-term, the company is of the opinion that the oil industry’s demand for drilling services will continue to be supported by the need for reserves replacement and by continued spending on exploration and field-development in the main offshore regions.”
The latest company to report market softening is Odfjell Drilling.
It too sees a softer near term deep- and ultra deepwater market evidenced by shorter lead times and decreased number of contract awards.
Odfjell Drilling has a UDW fleet of high spec 6th generation units, and as such believes it should be less impacted by the market fluctuations.
It says too that the harsh environment market, especially in the North Sea, will remain in better balance than the UDW market near term.
Also chiming with the pessimism, the head of Maersk Drilling warns of a market that charter rates could take until 2017 or 2018 to recover to last year’s levels.
Claus Hemmingsen, the CEO of Maersk Drilling, had expected a much shorter slack period. Notwithstanding the growing likelihood that rig rates in 2018 may not be materially different to where they are now, he still wants to grow the Maersk fleet, possibly ordering a further two units within the next 12 months.
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