Mexican offshore driller ODH could struggle to renew Pemex contracts

Mexican offshore driller Offshore Drilling Holding (ODH) has seen its credit rating downgraded to B-, with a negative outlook, as Fitch expects the company will have difficulties with contract renewals.

Credit rating agency Fitch said the rating action reflects heightened re-contracting risk for ODH in light of Pemex’s, the company sole off-taker, marked reductions to its capital investment program overall and more specifically to Pemex’s reduction in deepwater activities.

As part of Pemex’s MXN100 billion expenditure reduction, Fitch said, the company expects to reduce its 2016 investments in deep water exploration by approximately MXN10 billion and look instead for partners with which to carry on this activity in the future.

“This reduction in investments decreases the likelihood Pemex will continue requiring ODH’s drilling rigs in the short term and increases the company’s re-contracting risk once the renewed contracts start expiring towards the end of 2017,” Fitch said.

As for the negative outlook, Fitch said it considers the potential for a deeper and longer than forecasted offshore drilling down-cycle. The lower Recovery Rating reflects the distressed valuation of similar assets that have been sold recently to Ocean Rig UDW.

To remind, Ocean Rig UDW recently bought a drillship for a bargain price of $65 million. For comparison, total yard cost of a similar drillship Ocean Rig had ordered at Samsung Heavy in 2011 was $608 million.

Renewals concerns

Throughout the oil and gas industry, companies are facing pressure to renegotiate day rates. While this potentially could impact ODH, a larger concern is the renewal of its contracts with Pemex that expire toward the end of 2017, given Pemex’s decision to significantly cut its investments in deepwater exploration, Fitch said. Prior to the change in Pemex’s management team, ODH extended its Centenario and Bicentenario drilling rig contracts with Pemex until December 2017 at a day rate of USD365,000/day.

Fitch says that offshore drillers continue to face depressed market conditions due to lower demand and a significant oversupply of rigs. The severe decline in oil prices has compounded the effects of the offshore rig oversupply cycle resulting in continued global market day-rate deterioration.

“Fitch believes that demand for drill rigs will rebound in the medium-term and absorb the newer high-quality assets. We also believe that an uptick in demand for rigs will lag oil & gas price levels (estimated at $65 – $70/barrel for deepwater) by at least six-12 months,” the credit rating agency said.