In two recent blogs, I have looked toward the impending inflection point in the offshore drilling cycle, first exploring an uptick in the number of offshore vessel support company bankruptcy filings as the industry enters the last stage of the downturn.
Last week, Hornbeck Offshore announced a new financing arrangement to improve the company’s liquidity, removing — at least temporarily — the impending doom it faced from the upcoming maturity of its long-term debt. The news was positive for the company’s shareholders, but it doesn’t erase the problem of too many vessels chasing too few jobs, which confronts all offshore service vessel operators.
More recently, we highlighted the news that offshore drillers are starting to receive more inquiries and tenders for work, although the market remains as competitive as it has been for the last two years. The prospect of more offshore work on the horizon is good news, especially with oil companies figuring out how to reduce their well breakeven costs below $50 a barrel.
These trends and improvements were all underway before the recent retreat of global oil prices as OPEC’s production cut deal does not appear to be producing the desired results. Global inventories are falling much too slowly to encourage traders to bid up oil prices. Instead, prices have dropped.
The reality is that global oil inventories are falling, but it's been too slow for those investors seeking instant corrections.
Traders are now concerned that oil demand growth will slow and/or OPEC members will opt to cheat on their lower production quotas, thus preventing the oil market from improving to the point that it would support sharply higher prices.
The slow decline in inventories in the first half of this year has been caused somewhat by increased output from OPEC members Nigeria and Libya, who were exempt from the organization’s production cuts. North American oil output is also growing in response to higher drilling activity in the U.S. and Canada.
Predicting cycle tops and bottoms is virtually impossible to do. They are only seen in hindsight. The current offshore fundamentals are consistent with a cycle bottom and an inflection point that will bring an improvement in business. The current weakness in global oil prices is influenced by extremely pessimistic near-term sentiment about industry fundamentals. That sentiment can just as quickly shift to the positive without an obvious event.
Waiting for that shift to occur is frustrating because its timing cannot be influenced. There are no signs that industry fundamentals are suddenly deteriorating. Rather, they continue to improve, albeit slowly. A year from now, the industry will look back and reflect on how the cycle’s inflection point was reached this summer, even though it is not currently evident. Hopefully, the offshore sector’s recovery will be similar to that of the onshore sector where the U.S. rig count has risen for 22 consecutive weeks.