Just when it appeared the tide was turning somewhat in the offshore oil and gas sector’s favor as improved breakevens created work for offshore drillers, market forces began to pull it back down.

Analysis recently released by Rystad Energy shows that offshore drillers could lose a total of about $3 billion in revenue during the next two years due to canceled contracts. The firm, which put the estimated contract value for 2020 at $20 billion and $10 billion for 2021, says restructuring may be the route some drillers will have to take.

Already, six rigs years of contracts, valued at about $400 million, have been canceled, by Rystad’s accounts. The cancelations come as oil companies cut back on production as the industry works to navigate a market with too much oil and demand slowed by the COVID-19 virus that prompted travel restrictions worldwide.

“No one has specifically said they will restructure as of now. But we see that there is a lot of talks and speculations around the bigger drillers—some of which potentially needed restructuring even before the corona/oil-crisis hit us,” Oddmund Føre, vice president of energy service research for Rystad, told Hart Energy.

Without making sufficient capex cuts, the firm said offshore drillers and vessel providers likely won’t be able to pay debt based on cash flow from operating activities. Perhaps making matters more difficult for the rig industry is their dependence on new contracting activity to maintain utilization rates, which is tough in today’s environment, the analyst said.

“Of the 100 listed energy service companies analyzed by Rystad Energy across the various service segments for this research, more than two-thirds are unlikely to be able to meet their interest payment obligations on time this year,” the firm said. “Many offshore drillers will be living on the edge in the coming months.”

In late March, Maersk Drilling said it was notified from Tullow Ghana Ltd. of early termination of the drilling contract for the Maersk Venturer drillship. It is expected to end in June 2020 instead of February 2022.

Contracts for several others are also now set to end earlier than planned. These include a Shelf Drilling Ltd. contract for the Shelf Drilling Mentor and Tenacious premium jackup rigs and the early termination for the Trident XIV jackup.

Referencing uncertainty surrounding disruptions, Noble Corp. opted to withdraw its previously provided full-year 2020 financial guidance. The announcement came April 9, the day before OPEC and Russia agreed to cut production. Its latest fleet status report was filled with several notes and news of warm- and cold-stacked rigs.

One of the four rigs lined up for Exxon Mobil Corp. work in the Guyana-Suriname Basin was moved to another rig in the group. The one-year contract for the Noble Sam Croft was canceled, with its contract term moving to the Noble Don Taylor, the fleet report showed. The contracts were part of a commercial enablement agreement, intended to provide multiyear contract visibility and utilization for the drillships.

The report indicates the agreement allows for the repricing of day rates in March and September for the drillship along with the other two, Noble Tom Madden and Noble Bob Douglas. The report also pointed to several others seeking lower day rates and other contracts with day rates that had already been reduced.

Good news is that some drillers are landing new contracts and extensions.

Noble is among them with contract extensions for the Noble Mick O’Brien offshore Qatar and a contract for the Noble Clyde Boudreaux offshore Vietnam. Shelf Drilling also landed contract extensions for its High Island II, High Island IV, Main Pass I and Main Pass IV rigs among others and new contracts for Shelf Drilling Enterprise.

Still, no region appears to be escaping cutbacks.

“We would assume that activity on most of the fields that are already producing and under development would carry on, although the numbers of wells to be drilled might be revised in order to improve the business case in a low commodity price regime,” Føre said.

He noted all fields and prospects are up for scrutiny.

“In addition, all the regions are being impacted as travel, border restrictions and quarantines are making crew change very difficult due to COVID-19 meaning that the virus will impact operations directly through the supply chain and logistics,” he continued.

Rystad forecast there won’t be many contracts left for E&Ps to cancel, particularly in 2021.

Besides restructuring, Føre said there are some steps offshore drillers can do, or continue doing if such measures have already been taken, to help them get through these challenging times.

“Offshore drillers need to cut cost and trim their organization to the extent possible. They also need to work with the E&P side to make sure that they stay efficient and relevant in order for offshore to continue to be a competitive source of liquids in the future,” Føre said. “They can also work to optimize their fleet. Reducing the excess supply of rigs could be helpful to improve the utilization rates and in turn increase prizing power when the market comes back up again.”

Comments