Maersk Drilling sees signs of continued recovery in offshore drilling market
Danish offshore driller Maersk Drilling returned to profit in 2018 from a loss in 2017 while its revenues decreased due to lower day rates. The driller has said in its annual report for 2018 it is seeing signs of continued recovery in the offshore drilling market.
In 2018, Maersk Drilling’s revenue declined by 1% to $1.429 billion from $1.439 billion in 2017 due to lower average day rates across the fleet, partly offset by an increased number of contracted days. In 2016 and 2015 the driller’s revenues were $2.3 billion and $2.5 billion, respectively.
The driller’s profit for the year was $941 million compared to a loss of $1.5 billion in 2017. It is worth noting that Maersk Drilling’s profit in 2018 was the highest in five years. Namely, in 2016 Maersk Drilling had a loss of $790 million, in 2015 a profit of $601 million, and a profit of $468 million in 2014.
With an overall utilization of 69% in 2018 of the rig fleet, compared to 66% in 2017, Maersk Drilling has begun to see the effect of higher activity with an increased number of tenders and projects.
During the year, Maersk Drilling secured 12 new contracts and 13 contract extensions adding $503 million to the contract backlog. By the end of the year the revenue backlog amounted to $2.5 billion compared to $3.3 billion in 2017. Maersk Drilling has a forward contract coverage of 63% for 2019 providing a relatively high degree of visibility into 2019. The jack-up segment carries the highest forward contract coverage of 75% compared to 39% in the floater segment.
Maersk Drilling said it continues to see high demand for its ultra harsh environment jack-up rigs in the Norwegian sector. However, the market for floaters remains challenged with overcapacity and utilization at a level not yet able to support material pricing improvements.
As of December 31, 2018, Maersk Drilling had a net debt of $1.097 billion and liquidity reserves of $772 million.
Separation from A.P. Moller – Maersk
Since the announcement on August 17, 2018, of the intention to separate Maersk Drilling from A.P. Moller – Maersk by way of a demerger and listing in 2019, Maersk Drilling has made the planned organizational progress with all key management positions relevant for the demerger preparation being filled or confirmed.
Further, as part of the preparation for the separation, debt financing of $1.5 billion and a revolving credit facility of $400 million was secured in December 2018, from among others a consortium of international banks.
The process to establish a separate board of directors for Maersk Drilling, as well as an independent governance structure, was further progressed in January 2019 with the announcement of Kathleen McAllister, Robert Routs, and Robert M. Uggla as new board members joining Chairman Claus V. Hemmingsen, Martin N. Larsen and Mads Winther.
In 2019, capital expenditures are expected to be in the level of $300-350 million, an increase compared to 2018 due to the rig upgrades and yard stays.
Improving market fundamentals
According to Maersk Drilling, global offshore rig utilization levels continued to rise as a result of positive rig demand- and supply side factors.
The driller said that operator demand for offshore drilling rigs rose to approximately 480 rig years in 2018, representing an increase of approximately 2.5% when compared to the previous year. This moderate increase in rig demand was entirely driven by growth in demand for jack-up rigs of more than 4%, as the demand for floaters decreased by approximately 2% in 2018. Contractors continued to reduce offshore drilling rig supply, as 37 jack-ups and 20 floaters were scrapped during the year.
Leading indicators continued to provide support for future drilling activity, as increased tendering activity translated into more awarded contracts throughout the year. Contracting activity also exhibited an element of direct awards, where operators, either through alliances or directly with selected drilling contractors, bypassed the tendering process.
For the year ended December 31, 2018, total utilization levels for the global fleet stood at approximately 63% for jack-ups and 58% for floaters. This represents approximately a 4%-point increase compared to 2017.
Despite improved utilization indicators for the offshore drilling market, the global jack-up and floater markets continued to suffer from overcapacity.
The harsh environment segment, particularly in Norway, has benefited from limited supply of rigs resulting in increasing utilization as well as increasing day rates. The harsh environment segments are characterized by relatively higher barriers to entry and have exhibited above-average rig utilization and day rate levels over the course of the cycle compared with other more commoditized segments.
The industry continues to target cost reduction through operational efficiency improvements, integrated alliances and partnerships. A series of mergers and acquisitions amongst offshore drilling contractors also featured throughout the year. Altogether, this conveys a signal of continued recovery in the offshore drilling market, Maersk Drilling concluded.
Offshore Energy Today Staff