Several quarterly earnings reports released in May appear to support projections that a downturn in the offshore drilling market, especially in deepwater, looms. The question is how serious will the downturn be?
In late May, Seadrill, the world’s largest offshore rig company by market capitalization, turned gloomy about prospects for the global drilling market in its first-quarter earnings report. The company projected falling charter rates as oil companies cut capital spending to protect margins. Seadrill’s gloomy forecast comes on the heels of several months of capital expenditure cuts by oil companies following a decade-long surge in investments. “It was not expected that activity would come to a virtual halt while oil companies worked through their forward budgeting process,” Seadrill said in the earnings report.
Based on its projections, Seadrill expects rates for new-generation vessels to fall to $425,000-$475,000 per day, well below their peak of about $650,000 a day last year. Until the situation improves, Seadrill said it would not order any more new rigs from yards on top of the 19 rigs it already has on order.
Seadrill competitor Diamond Offshore Drilling, one of the world’s top five offshore rig contractors, reported a 17% drop in quarterly profit for the first quarter as demand fell for rigs used in deepwater drilling. Diamond Offshore has two rigs due for delivery in 2014 but has yet to land contracts for them. The utilization rate for the company’s deepwater rigs fell to 64% in the March quarter, down from 94% a year earlier. Analysts expect only a modest recovery in demand in the second half of the year, with rig utilization staying below 2013 levels.
For OSV operators, these quarterly reports are worth watching.
