Current oil prices cannot support uptick in offshore rig demand, Danish driller says

Danish offshore drilling contractor Maersk Drilling saw its first quarter 2017 results negatively affected by the overcapacity in the rig market. The company said the current oil prices are well below what is needed to support growth in offshore rig demand.

The company’s revenue fell to $344 million, from $654 million a year ago. Profit was $48 million, a drop from $222 million a year ago. Maersk Drilling has said the result was impacted by a significant number of rigs being idle but positively impacted by higher operational uptime, cost savings and lower depreciation due to the impairments in Q4 2016.

The driller said its rigs delivered a high operational performance across the fleet with an average operational uptime of 100% (96% in 1Q 2016) for the jack-up rigs and 97% (98% in 1Q 2016) for the floating rigs.

At the end of Q1 2017, Maersk Drilling’s forward contract coverage was 57% for 2017, 46% for 2018 and 25% for 2019. Maersk has described its backlog as one of the strongest in the industry. The total revenue backlog by the end of Q1 amounted to $3.4bn ($4.7bn).

Maersk Drilling said the Brent crude prices at around $50 are well below levels required to support sustained increase in offshore rig demand.

Too many rigs out there

The company does not expect to see significant improvements in offshore rig demand until the market reaches a stable oil price above $60 per barrel or until offshore drilling cost levels adjust to a lower oil price, it said on Thursday.

Maersk said there were too many offshore rigs available in the market. Approximately 135 floaters and 225 jack-up rigs have been stacked, while the newbuild order book still comprises approximately 40 floaters and 90 jack-up rigs scheduled for delivery, the vast majority of which do not have contracts, Maersk Drilling said.

“Whilst the market has seen some scrapping in the older floaters fleet, the level of scrapping amongst jack-ups has been marginal. With the excess supply, the market outlook for offshore drilling remains challenged despite increasing tendering activity, as the day rates currently being tendered are typically close to or below operating cost,” the Copenhagen-based firm added.

“Furthermore, the contracts are short in length, leading to idle periods between contracts and higher operating costs for mobilisation, start-up and ramp-down. In the near-term, rig utilisation and day-rates could continue to trend downward, requiring a reduction in the rig supply before recovery. During Q1 2017, there are signs that utilisation for jack-up rigs will begin to pick up as first half of 2017 progresses, with the floater rig market expected to be 6-12 months behind in recovery.”

“This view of reaching or approaching the bottom of the market has led to several M&A transactions for rigs during the first quarter, as companies including new entrants look to take advantage of distressed players and reduced asset prices, however, this does not help resolve the oversupply issues for the industry and only increases the number of competitors.”

Stacking case-by-case

At the end of Q1, Maersk Drilling was preparing the Mærsk Developer and Maersk Resolute rigs for contracts in Q2. Further, eight rigs were idled and off contract. As the market outlook for the offshore drilling industry remains highly uncertain, Maersk Drilling continues to evaluate stacking on a case-by-case basis, the company said.

“Ahead of rigs becoming idle, Maersk Drilling assesses the most attractive stacking conditions and locations for the rigs in balanced consideration of commercial opportunities, maintenance plans and costs as well as portfolio considerations. So far, this strategy has resulted in all idle rigs currently being warm-stacked,” it sad.

To remind, earlier this year Maersk managed to secure a contract for Maersk Developer semi-submersible rig, which had been stacked for almost a year.

The contract covers the drilling of the Siluro-1 Exploration Prospect well, estimated to have a duration of 42 days. The estimated contract value is $12 million, including mobilization and demobilization.

Offshore Energy Today Staff