An oversupply of oil, a dramatic slowdown in spending plus little expected movement toward final investment decisions (FIDs) by operators amid lower demand means more pain for offshore drillers.

Demand for rigs of all types is dwindling in several regions as some oil and gas companies, with tighter budgets, look to get out of contracts or successfully negotiate lower day rates. Difficult market conditions have already moved Diamond Offshore Drilling Inc. to file for bankruptcy.

More bankruptcies and restructuring are likely to follow, analysts say.

Mass consolidation of offshore drillers, as some may have once expected, probably isn’t happening anytime soon, considering some candidates once thought to be in a position to buy are now in the pool of purchase candidates, according to Terry Childs, head of RigLogix at Westwood Global Energy Group. Speaking during a webinar with James West, senior managing director and partner of Evercore ISI, Childs said no company has the capacity.

“Taking care of supply, I think, is the main thing,” he said, referring to the retirement of rigs being the desired focus. This might be when rig owners “take care of that quicker than maybe they would have otherwise.”

Offshore driller Valaris Plc said April 29 it planned to stack some uncontracted rigs and remove three drillships and four semisubmersibles from its fleet.

“We are executing plans that will lower operating costs for contracted rigs, rightsize our onshore organization for anticipated lower levels of fleet utilization, and improve our working capital management,” Valaris CEO Tom Burke said in a company statement. “We are also evaluating various alternatives to address our capital structure and annual interest costs, including, without limitation, a comprehensive debt restructuring that may require a substantial conversion of our indebtedness to equity.” 

The offshore sector had been slowly rebuilding following the last downturn; however, the COVID-19 global pandemic and oil price crash have dealt another blow to the offshore sector and hopes of near-term profitability have diminished.

About 49 offshore rig contracts for jackups, semisubmersibles and drillships have been canceled since mid-March, Childs said. In comparison, 175 or so contracts were terminated between 2015 and 2019. “It’s on pace right now to really do some big damage similarly to that period,” he said.

Back during 2011-2013 floater rig rates, for example, were about $500,000 per day, he said. Now, it’s about half of that. Jackup day rates have also fallen.

Depending on the rig contract, rates could fall further. Though, Childs said he doesn’t know “what the appetite is for rig owners to race to the bottom again.”

Westwood had anticipated between 60 and 65 FIDs this year. That’s dropped to 24.

Devising a rig outlook is a challenge, considering ongoing contract adjustments.

“It seems like we have to run these numbers every week now,” he said, adding generally the count will be down.

Regional Roundup

Every region has been impacted.

There are already two idled ships in the Gulf of Mexico (GoM), Childs said, noting more are probably on the way. The single tender present—a large one with about 10 wells and five options for at least a year’s worth of work—will likely draw several bidders, he added.

By the time the job starts, however, seven or eight rigs could be available.

As for jackups, “I don’t see the jackup market here being more than a four to six working rig fleet for much of ongoing future,” Childs added. He characterized the GoM—which earlier this year was poised to see continued rebound—as “not a great market” outside of deep water.

Operators are also deferring programs in the North Sea, where the analyst said the U.K. is faring worse than Norway with jackup cancelations outnumbering semis by 3-to-1.

Given today’s market conditions and oil prices, Childs said he doesn’t believe there is a day rate that would incentivize an operator to change its mind and keep a rig, “at least not one that any rig owner would be willing to offer.” Still, he seemed optimistic for the future here, saying the market would bounce back.

The Asia-Pacific region has seen 10 rig terminations or suspensions, with two of them expected to restart under the existing contract, he added.

Africa has been the hardest hit, the analyst said, with 12 contract terminations.

In the Middle East, operators have been mainly asking for rate cuts, Childs added, noting there have been just a few cancelations.

The Brazil region, however, doesn’t appear to be doing so badly, according to Childs. There haven’t been many contract cancelations there, though Petrobras has deferred more tenders. Elsewhere in South America, there also been few cancelations. Among these were a canceled contract for a Maersk semisubmersible offshore Trinidad and the Noble Sam Croft offshore Guyana.

Eyeing Normalcy

Assuming travel returns to normal and oil prices improve, some industry watchers anticipate a pickup in rig counts next year as pent-up demand is unleashed. Childs said he doesn’t necessarily agree, as that’s been the story for the last three years. Improved utilization could come in second-half 2021, he added.

When the pandemic and current oil market crisis has passed, the analyst sees the sector recovering the same way it has in the past: starting with shallow water and jackups.

“I think in terms of normalization … operators are looking for rate cuts and there certainly will be some rate cuts,” he added. “Maybe there won’t be many lengthy contracts signed, maybe the contracting will be of a shorter duration so there won’t be any issues with having to cancel or do anything like that.”

The analyst also expects to see some changes to rig operations in a post-COVID-19 world, based on conversations with some rig owners. These could include enhanced screening of crews going on and off rigs, more subject matter experts onshore for predictive maintenance and troubleshooting, and enhanced IT capabilities.

Expanded digital initiatives beyond what has already taken place in the last few years, however, is not anticipated as some may believe. The reason: money.

“We’re in this reduced spending environment. So, unless an operator is going to fund this … they’re not going to have the money to go and do all this digital enhancement,” he said.

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