DENVER/OSLO: The companies that operate offshore drilling rigs for major oil producers face a second wave of bankruptcies in four years amid a historic drop in energy prices that likely will leave surviving drillers more closely tied to big oil firms.
A collapse of the offshore industry will have broad impact. Drillers and their suppliers have driven innovation that has helped shale and offshore wind companies by pioneering remote monitoring and control, and last year directly generated about 25 per cent of global oil production.
The offshore services business is the worst performing of the oilfield services sector, with shares of the 10 largest publicly traded down 77 per cent since the start of the year.
Four of the seven largest offshore drillers – Diamond Offshore Drilling Inc, Noble Corp, Seadrill Ltd and Valaris Plc – have sought protection from creditors or begun debt restructuring talks that could lead to bankruptcy.
Two others are reaching out to their creditors. Pacific Drilling last month said it may need to modify terms of its debt, and was seeking alternative funding in the event creditors would not accept new terms. Shelf Drilling, the ninth largest by revenue, is seeking talks with creditors over loan covenants that take effect next year, executives said.
The latest offshore industry’s turmoil “is going to change things in many ways,” Odfjell Drilling Chief Executive Simen Lieungh said in an interview. “Existing players and the existing structures will probably not be there as today,” he said referring to companies scrapping rigs.
EARLY OPTIMISM FADES
The sector had limped along as exploration fell due to high costs and the advent of cheaper U.S. shale. Then, a flurry of giant discoveries off the coasts of South America and Africa rekindled oil majors’ interest in deep water projects and led to a boom in offshore leases two years ago.
Drillers began the year predicting a recovery with oil prices at $60 per barrel. But optimism soured as the pandemic crushed demand and oil prices fell below $20 in April.
This month, the number of floating rigs at work is expected to hit the lowest level since 1986 as oil companies cancel or defer contracts, said industry executives and analysts.
The last downturn was cushioned by help from oil producers. Between 2014 and 2016, as crude fell to $26 per barrel from over $100, oil majors spread work among drillers to keep exploring off the coasts of Brazil, Mozambique and in the Mediterranean. That allowed drillers whose rig contracts were canceled to pick up some jobs, albeit at lower lease rates.
The offshore industry was financially stronger then. Many had entered that downturn with large order backlogs and held contracts with lease rates higher than today’s, said Jorn Madsen, CEO of Maersk Drilling.
But with oil majors this year slashing their own spending by between 30 per cent and 50 per cent to preserve cash and pay dividends there is no safety net. Winners will be those companies that get debts refinanced and get through the next two years, said industry officials.
Offshore service firms may need to…
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