Paragon Offshore CEO: Rig dayrates on a downward slope

Paragon Offshore CEO Randall D. Stilley has in the first quarter results presentation provided a bleak outlook for the offshore drilling industry for the remainder of the year, saying that there may be more contract cancellations and renegotiations.

His company, Paragon Offshore, operating a standard specification rig fleet, has reported a fall in its first quarter net income of $61.1 million, compared to $124.6 in 1Q 2014. Total revenues for the first quarter of 2015 were $430.6 million compared to $495.0 million in the fourth quarter of 2014.

“In the midst of a challenging environment, Paragon delivered another strong quarter of operational results with unpaid downtime below two percent and cost control efforts well underway,” said Randall D. Stilley, President and Chief Executive Officer. “We also successfully concluded the Prospector acquisition and fully repaid the outstanding Prospector debt using our revolving credit facility. In addition, we added $108 million of contract backlog during the quarter, demonstrating that customers continue to value Paragon’s safe, reliable, and efficient standard fleet.”

Total revenues for the first quarter of 2015 were $430.6 million compared to $495.0 million in the fourth quarter of 2014.

Paragon reported utilization for its marketed rig fleet, which excludes one recently stacked floater, as 74 percent for the first quarter of 2015, as compared to 84 percent in the fourth quarter of 2014.

Average daily revenues increased three percent in the first quarter of 2015 to $152,000 per rig compared to the previous quarter average of $149,000 per rig. Contract drilling operating costs increased slightly in the first quarter to $225.1 million compared to $224.5 million in the fourth quarter of 2014.

Terminations by Pemex, dayrates heading down

On May 6, 2015, Paragon reported that a subsidiary had received written notices of termination from PEMEX – Exploración y Producción (“PEMEX”) of the drilling contracts on the Paragon L1113 and the Paragon B301. These contracts have been terminated by PEMEX pursuant to PEMEX’s right to terminate the contracts on 30 days’ notice. The effective termination dates for the contracts is expected to be late May 2015.

As a result of the contract terminations, Paragon’s backlog decreased by approximately $60 million. Paragon said it continues to engage in discussions with PEMEX regarding the company’s remaining drilling rigs operating in Mexico.

Stilley concluded: “Despite recent improvements in oil prices, conditions in the offshore drilling space are likely to deteriorate further during the remainder of 2015. Dayrates may head lower, driven by a variety of supply and demand factors; and we believe the industry will see additional contract renegotiations and outright contract cancellations.

He said the company has several ways to navigating these turbulent waters. According to Stilley these include: (1) reduction operating costs and capital expenditures to preserve contract drilling margins and liquidity; (2) refinancing the debt the company assumed as part of the Prospector acquisition; (3) aggressively pursuing new contracts by utilizing Paragon’s position as the low cost provider of offshore rigs; (4) and evaluation additional opportunities to strengthen the company’s balance sheet.