Continued scrapping of rigs needed to balance demand and supply, Maersk Drilling says

  • Business & Finance

Offshore drilling contractor Maersk Drilling believes that continued rig scrapping is needed to obtain a healthier balance between rig demand and supply amid difficult circumstances in the offshore drilling market, which has been hit hard by the low oil price and coronavirus pandemic.

The sharp decline in oil and gas prices in the first quarter of 2020 has pushed operators to take the axe to their spending plans, which has lead to delays in sanctioning new projects and ongoing tenders as well as renegotiations of existing drilling contracts and suspension and termination decisions.

Based on current tender activity and bilateral customer dialogues, Maersk Drilling said on Wednesday that it expects that the number of new contracts for drilling campaigns starting in 2020 will be limited, while the demand pipeline for campaigns with commencement in 2021 is building up due to postponement of projects originally scheduled for 2020.

To what extent the current project pipeline for 2021 will materialise into new drilling contracts depends on the development in the oil and gas prices and the overall uncertainty in the oil market, Maersk Drilling stated.

The drilling contractor also noted that the market for the ultra-harsh jack-up rigs is expected to be more resilient compared to the broader harsh environment jack-up market and the international floater market.

Many stacked rigs across the offshore drilling industry continue to incur stacking costs despite unfavourable commercial prospects, and given excess supply in most market segments, Maersk Drilling believes continued scrapping of rigs is needed to obtain a healthier balance between demand and supply.

The secondary market for offshore rigs remains illiquid with bid-ask spreads continuing to be too wide to facilitate any market transactions.

Backlog affected by contract termination

Maersk Drilling’s revenue backlog at the end of March amounted to $1.7 billion.

The backlog was reduced by $175 million related to the termination of the drilling contract for Maersk Venturer and by $45 million related to the changed duration of certain activity-based contracts as well as the impact from depreciation of the NOK on certain split rate contracts.

At the end of March, Maersk Drilling’s forward contract coverage for the remainder of 2020 was 63 per cent for the North Sea jack-up segment and 62 per cent for the International floater segment.

The average backlog day rates for the remaining part of 2020 were $174,000 for the North Sea segment and $230,000 for the International segment.

When it comes to the driller’s financial performance in 1Q 2020, the company’s revenues were $279 million compared to revenues of $305 million in 4Q 2019 impacted by lower utilisation in the North Sea jack-up segment, partly offset by higher utilisation in the International floater segment but at a lower average day rate.

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