Oil price free fall tip of iceberg

I am sure you all know the story of the Titanic. It’s commonly believed that had sufficient precautions been taken, especially with lookouts, the ocean liner might have seen and avoided the iceberg.

Fast forward 100 years and you could say the same thing about what’s underway in the offshore drilling industry. Surely someone could have seen the iceberg coming, just as some in the offshore drilling industry should have seen the oil price crisis coming. All they had to do was look.

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For example, take a look at Hercules Offshore. Late last year, the company laid down four offshore jackups and terminated over 300 rig workers in the wake of falling oil prices. It should have come as no surprise. The company was running at the back of the jackup pack, with an average rig age of 33 years and a debt-to-capital ratio of 58%. Tellingly, Hercules’ share value had fallen by more than 90% from its initial offering in 2005 through the end of last year. Clearly, there was a paper-thin margin, one that could not withstand a serious decline in oil price.

At the other end of the spectrum was Transocean, a company known for its next-generation deepwater rigs, commitment to innovation, and the world’s largest fleet of offshore rigs. But the debt to build those rigs, with others on the way, stood at $9.1 billion at the beginning of the year. As the year worsened, so did Transocean’s outlook. As a result, the company became the worst performer in the S&P 500 last year. At the end of 2014, Transocean announced the retirement of seven older rigs, joining four retired earlier in the year, with unspecified layoffs.

Both Hercules’ and Transocean’s woes were born in a time when oil prices were significantly higher than today’s per barrel range. The oil price decline was just the first iceberg. The second is havoc in the offshore drilling industry, with its subsequent layoffs. We have just seen the tip of that iceberg and, like the Titanic, it appears to be too late to avoid it.

About the author

Dr. William J. Pike

Dr. William J. Pike has 45 years experience in the upstream oil and gas industry, including more than 20 years in oil and gas drilling and production operations, both onshore and offshore. He has worked in the U.S., Canada, Britain, Europe and Russia as a technical and economic advisor to the energy industries and various governmental agencies. Pike was editor-in-chief and editorial director for Hart Energy Publishing’s E&P magazine and was also the editor of the Journal of Petroleum Technology, the official publication of the Society of Petroleum Engineers. He holds a doctorate in energy economics from the University of Aberdeen in Scotland.

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