Bassoe: Offshore rig market shakeup to continue in 2018 amid persistent low dayrates
The theme for 2017 was perseverance. For 2018, it’s adaptation.
Our offshore rig market outlook for 2018 is based on 1) an oil price which could move within a range over $80 and down to $50 and 2) modest, but increasing, drilling activity.
Overall, the market this year will see a continuation of the themes of 2017, with more rig owner consolidation, an increase in competitive rig supply as newbuilds enter the market, more scrapping, and low dayrates.
Here’s a summary of some of the main trends for 2018.
Offshore drilling activity to pick up slightly, but oversupply to hold dayrates in check
The oil price, traditionally one of the most influential drivers of offshore drilling activity, is now higher than it’s been in almost three years. This year, however, according to a recent report by Wood Mackenzie, oil companies will cut spending on exploration for a fifth consecutive year (down to $37 billion).
Efficiency, low-cost developments, high budget-sensitivity, and prudence in exploration and production planning will constrain the rig market for years to come.
While this doesn’t mean that offshore drilling will decrease (because oil companies can drill more with less money as rig rates are still much lower than they once were), it doesn’t signal a boom in offshore drilling and, with a few exceptions, likely signals the perpetuation of the current dayrate environment – even with the possibility that over 300 old rigs could gradually leave the market.
The good and the bad of 2018
The Norwegian semi-sub market will stay hot
Once the sale of the Midmax is complete (which we expect early this year), there will be no stranded newbuild first-tier Norway-compliant semisub available for sale. Even if tendering activity for long-term contracts doesn’t increase significantly this year, the Norwegian market will start taking these rigs in over time while older, lower generation rigs are either scrapped or moved to the UK sector.
With the potential shortage of high specification 6th gen rigs in Norway, dayrates for this segment will rise faster than any other – possibly over $300,000 by the end of the year. As such, our Rig Valuation Tool (RVT) now values these rigs at over $500 million for the top end of the fleet.
Higher jack-up demand offset by more stranded newbuilds entering the market
On the jack-up side, we expect more tenders (especially in the Middle East and Southeast Asia), but also more competition as previously stranded newbuilds start competing – and that’s even before you get to speculatively built rigs in China. All in all, we see the jack-up market in 2018 looking very similar to the second half of 2017 with rates at or slightly above break-even levels.
In addition to acquisitions of the remaining stranded newbuilds, we expect more second-hand transactions (for newer assets) as owners look to rebalance their fleets. After significant upward movements in values for newer jack-ups in 2017, we see values for post-2010 built, higher specification jack-ups rising modestly this year.
Deep and ultra deepwater will continue to struggle
Demand for deepwater drilling in Brazil, Mexico, and West Africa will remain low even though operators in these regions could initiate a limited number of projects. But with long lead times for deepwater projects, the effect of this will be minor and won’t be seen until late in the year at best.
Dayrates for ultra deepwater drillships will remain in the $150,000 to $200,000 range for the year (and beyond), and owners of such rigs will aggressively compete for contracts which, even at break-even rates, offer better financials than long-term stacking.
Values for ultra deepwater rigs decreased further in 2017, and we see values in 2018 remaining under $280 million range for the highest spec units (in drilling condition) and down to around $150 million for cold stacked rigs. Significant downside value risk threatens older, terminally stacked rigs as reactivation costs grow.
More scrapping of jack-ups; possibly the first ultra deepwater drillship to be scrapped
The trend of jack-up scrapping finally hit in 2017 and will continue in 2018. Over 30 jack-ups were sold for scrap last year. Up to 50 will be scrapped or sold for conversion this year.
Along with that, the scrapping of older floaters will continue. And we wouldn’t be surprised to see one or more post-2000 built ultra deepwater drillships scrapped as stacking and reactivation costs overwhelm cash-strapped owners.
More major consolidation in the market
Transaction activity last year was dominated by private equity. New entrants like Borr Drilling and Northern Drilling emerged to snap up distressed assets and take advantage of low asset values, spending nearly $4 billion in the process.
Now that rig values have climbed much higher than they were a year ago (apart from deepwater floaters), we think that the main source of transaction activity will come from established rig owners who see the need to consolidate (and that’s what the market needs).
Adaptation is the theme for 2018
It’s easy to say, and hard to do. But the only way to make it is, as always, to adapt to the market. Tough decisions will have to be made this year. Some rigs will disappear; some owners will cease to exist. But those who operate in the offshore drilling industry need to assume that what they see now is what they’re going to get for at least the rest of this decade and work with it.
That doesn’t mean the rig market is bad. It just means it’s harder to extract the good out of it.
Successful drilling contractors will put rigs back to work at low rates to keep them well-maintained, implement new operational systems, adopt new technology, develop better ways to stack rigs, find partnerships, sell or acquire assets (optimizing their fleets), and engineer more sustainable financial structures.
2018 will prove that there are great places to be, good places to be, and bad places to be in the market. It will prove that the recent fundamental changes that have taken place will last long enough to require far-reaching, strategic adaptations as the shakeup in the market continues.
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