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By Liz Hampton and Nerijus Adomaitis
DENVER/OSLO, June 24 (Reuters) - 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% 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% 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.
(For a graphic on global drilling rigs, click on: https://fingfx.thomsonreuters.com/gfx/editorcharts/jbyprrjkape/index.html)
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% and 50% 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 scrap up to 200 of the
about 800 existing floating rigs to regain profitable lease
rates, said David Carter Shinn, head of analysis for rig
brokerage Bassoe Offshore.
There is little hope for a rebound in the next few years.
Many oil producers are withdrawing from projects that require
$60 per barrel to earn a profit, concluding it could be years
before they see that price again. Chevron, Exxon Mobil
, Petronas and Royal Dutch Shell ended
drilling contracts early this year to save money.
"Higher cost production in our industry will be shut in and
projects will be delayed," said Rick Fowler, chief operating
officer at U.S. offshore oil producer LLOG Exploration.
Chevron said it will limit offshore work to fields that
connect to existing infrastructure rather than start new
exploration. Exxon, BP, Total and Shell
declined to comment or did not reply to requests for comment on
the impact on their drilling plans.
The abrupt halt of exploration has been devastating to
drillers. They are writing down billions of dollars on the value
of their fleets.
Finding new money will be difficult, said Basil Karampelas,
a managing director at SierraConstellation Partners who advises
companies on financial restructurings.
Bankruptcy investors evaluate companies on 13-week or
26-week cash flows in making decisions, he said. But for many
drillers, there will be little to show. Creditors, he said,
"will have to decide if they want to ante up to get past that
period."
THE PATH AHEAD
Many of the offshore drillers are scrapping or retiring
vessels, having concluded it may be years before they are needed
again. Valaris plans to scrap 11 rigs and put aside nine others,
estimating it may take two years before they are needed again.
Seadrill, which slipped into bankruptcy in 2017 after the
last oil price downturn, pioneered a model for sharing costs
that might prove a path forward, said analysts.
It formed joint ventures with customers including a Qatar
Petroleum spinoff and Sonangol Group that have survived the last
downturn. The joint ventures focused on oil fields that have
long lives and gave drillers a way to lower their contract
risks.
The Seadrill ventures "have delivered increased fleet
utilization and incremental access to markets that are expected
to show significant growth over the coming years," Seadrill
spokesman Ian Cracknell said.
"It could be one of the few options to move forward," said
William Turner, a vice president at Welligence Energy Analytics.
"There is not a lot more folks can do to lower costs, especially
in deepwater. They are going to have to get creative to
survive," he said.
(Reporting by Liz Hampton in Denver and Nerijus Adomaitis in
Oslo
Editing by Marguerita Choy)