S&P slashes Diamond Offshore’s credit rating on tough drilling market conditions

Exploration & Production

Credit Rating’s agency Standard and Poor’s has downgraded its corporate credit rating on Houston-based offshore drilling company Diamond Offshore Drilling Inc. to ‘BB+’ from ‘BBB’. The rating outlook is negative.

S&P pointed to the persisting weak conditions in the global offshore drilling industry, caused by limited demand and the “still increasing” rig supply.

Apart from this S&P said Diamond Offshore had a “high percentage” of cold-stacked rigs, “most of which we don’t expect to return to work.”

In the recent quarterly presentation, Diamond Offshore’s CEO Marc Edwards acknowledged the downward cycle for the offshore drillers has not bottomed out.

He said the company expects the downward trajectory could continue to fall maybe even to fourth quarter 2017, adding that it’s probably going to be the back end of 2017, “when we start truly to see activity pick up.”

While Edwards sees the end of the next year as a potential inflection point in the industry demand, S&P in its report on Tuesday said it believed “we believe demand for offshore contract drilling services will remain depressed until the latter half of 2018 and that the market is oversupplied with rigs.”

Also, Standard & Poor’s said that as of September 1, 2016, Diamond had 14 of its 28-vessel fleet cold-stacked.

“We…believe that companies with cold-stacked rigs will find it increasingly difficult to recontract them even when the market recovers, since we expect customers to favor working, warm-stacked or newbuild rigs,” S&P said.

Explaining the “negative outlook” S&P added: “The outlook is negative, reflecting our expectation that Diamond’s leverage could increase and remain above levels we view as appropriate for the rating, which could occur if market conditions deteriorate further or if we no longer expect an industry recovery in 2018.

Offshore Energy Today Staff