Offshore Drillers Find It Harder to Float Above Sinking Demand

NEW YORK (Dow Jones Newswires), Jan. 22, 2009

Offshore drillers are starting to be dragged down by the oil market's undertow.

The rapid decline in oil prices from above $145 a barrel last summer to around $40 today has forced producers to cut their budgets, slamming the oilfield services companies that rely on that spending. Offshore drillers had until recently held up better than companies that drill onshore, or firms that boost production in wells and provide other technologies, such as Schlumberger Ltd. and Halliburton Co.

Waterborne rigs are often employed in exploration ventures that take years to complete, and are therefore less likely to be shut down during a short-term dip in oil prices. Most rigs are also working outside the U.S. and Canada, the first and hardest hit during most energy industry slumps. Schlumberger, the world's largest oilfield services company by market capitalization, reports fourth-quarter earnings on Friday.

But the global economic downturn's effects are heading out to sea. The market for shallow-water rigs, which tend to operate on short-term contracts to drill older fields, is shrinking fast. Shares of large drillers such as Transocean Inc. and Noble Corp. are down 40% or more since the start of the fourth quarter. They are also underperforming the Oil Service Sector index, which tracks service company shares, after exceeding the benchmark for most of the fourth quarter.

The offshore drillers point to lucrative, long-term contracts for their deepwater rigs as a final line of defense against the downturn. But the prospect of a slump in oil prices lasting through 2009 -- or longer -- is starting to pose a threat to the deepwater market as well. A handful of seemingly airtight rig contracts have already been threatened by producers' cash flow problems. Drillers will come under increasing pressure to re-negotiate other deals made when oil prices were rising, analysts say.

"I can tell you having gone through this a bunch of times that (if) it gets ugly long enough, some of these guys get squeamish, and you will see rates fall," said David Williams, chief executive of Noble, in a conference call Thursday following the disclosure of a fourth-quarter net profit that came in slightly better than expected. "And once you see rates falling, it gets ugly in a hurry."

Noble maintains that the deepwater rig market remains healthy, though demand is flagging in some areas for shallow-water drilling. The company reported a 20% increase in fourth-quarter earnings from a year earlier. Analysts expect earnings to fall to $5.82 a share in 2009 and $4.42 in 2010, from $5.85 last year.

Shallow To Deep

The downturn has hit the shallow-water rig market hardest, as those drillers tend to work on smaller, older projects that are less profitable and easier to shut down when oil prices fall.

Many of the largest untapped oil reserves lie further offshore, and can be accessed by only a few dozen rigs that can drill in waters up to 10,000 feet deep. There were until recently far more wells producers wanted drilled than there were rigs. Offshore drillers competed to build rigs that could operate in the deepest water, and garner the highest fees, known as dayrates. The cost of leasing the most high-tech rigs topped $600,000 a day last year, with some contracts stretching into 2015.

That race is over. While producers are generally confident that oil prices will begin to rise again in 2010, they are delaying commitments to large new projects, or to spending $200 million a year on a rig. Dayrates have plateaued, and it's becoming rare to see new contracts extending past 2011. The lack of new contracts could prove especially painful for drillers, who have relied on their guaranteed long-term revenue to raise money.

"I cannot see any significant contracts getting done in the first half of 2009, which from a stock (price) perspective is not good," said Brian Uhlmer, an oilfield services analyst with Pritchard Capital Partners in Houston. "There's no sense of urgency from (producers) anymore."

Most rigs are already contracted through 2011, insulating deepwater drillers from the effects of the downturn until then. Uhlmer anticipates that the highest dayrates on new contracts will fall by about 15%.

Wavering Commitments

The existing contracts may not be as airtight as they seem. Drillers could reduce dayrates in exchange for contract extensions from their current customers, said Bill Herbert, an analyst at Simmons & Co.

If oil prices remain low "this time next year, then the risk of contract re-negotiations...and contract cancellation will go up dramatically," Herbert said.

Two drillers recently caught a glimpse of this worst-case scenario for the rig market. A British unit of Calgary-based Oilexco Inc. entered administration, a form of bankruptcy, putting rig contracts with Transocean Inc. and Diamond Offshore Drilling Inc. in jeopardy. Transocean also canceled a contract with Burgundy Global Exploration Corp. after the Philippines-based corporation failed to put up required up-front funds.

About 90% of Transocean's rigs are contracted out to large producers, such as Chevron Corp., which are extremely unlikely to default, Uhlmer said. Noble's Williams said the company has talked with "a couple" of customers about potential cash flow problems, but has yet to have any producer threaten to renege on a contract.

Copyright (c) 2008 Dow Jones & Company, Inc.

Related Companies
 Company: Halliburton Companymore info
 - Halliburton Warns Of First-Quarter Profit Miss As Costs Rise (Mar 24)
 - Halliburton Asks Workers From Banned Countries Not To Travel To US (Jan 31)
 - Shale Frackers' Weak Sales Leave Investors Asking What Growth? (Jan 25)
 Company: Chevron Corporationmore info
 - Chevron Says Restarting Output At Gorgon Train Two LNG Project In Australia (Apr 18)
 - Sources: Chevron Exploring Sale Of Canada Oil Sands Stake Worth About $2.5B (Apr 13)
 - Gulf Of Mexico Lease Sale Nets $315M in Bids, Feds Suggest Trump Bounce (Mar 22)
 Company: Schlumbergermore info
 - Schlumberger Posts Smaller Fourth-Quarter Loss (Jan 20)
 - Schlumberger Expands Production Services Portfolio with Peak Buy (Jan 5)
 - Oilfield Services Giant Schlumberger Cuts More Jobs (Dec 12)
 Company: Transocean Ltd.more info

 - Transocean Notes Management Changes (Dec 3)
 - Transocean Has A Third Of Deepwater Rigs Seeking 2014 Work (Nov 21)
 - Transocean's Alaska Rig Contract with Shell Starts July 2014 (Nov 19)
 Company: Diamond Offshoremore info

 - Diamond Offshore CEO Lawrence Dickerson to Retire (Sep 24)
 - Offshore Contractors Adjust Rig Fleets on Brazil Woes (Sep 20)
 - Diamond Beats Expectations Despite Drop in Earnings (Jul 25)
 Company: Noble Corporationmore info

 - Diamond Profit Beats Estimates, but Rig Delays Weigh on Shares (Oct 24)
 - Colorado Residents and Oil, Gas Industry Continue Open Dialogue Efforts (Oct 4)
 - Noble Corp to Spin Off Older Drilling Rigs into New Company (Sep 25)
 Company: Oilexcomore info
 - Flexlife Completes Major Projects Using New Scanning Technology (Sep 15)
 - Oilexco Files Eighth Default Status Report (Jul 21)
 - Oil's Move Could Fuel E&P Deals (May 27)
For More Information on the Offshore Rig Fleet:
RigLogix can provide the information that you need about the offshore rig fleet, whether you need utilization and industry trends or detailed reports on future rig contracts. Subscribing to RigLogix will allow you to access dozens of prebuilt reports and build your own custom reports using hundreds of available data columns. For more information about a RigLogix subscription, visit

Our Privacy Pledge

Most Popular Articles

From the Career Center
Jobs that may interest you
Mechanical Engineer III
Expertise: Mechanical Engineering
Location: Lusby, 
Wireline Engineer
Expertise: WellSite Supervisor|Wireline|Wireline Logging
Location: Fort Morgan, CO
Wireline Engineer
Expertise: WellSite Supervisor|Wireline|Wireline Logging
Location: Williston, ND
search for more jobs

Brent Crude Oil : $52.1/BBL 0.96%
Light Crude Oil : $49.56/BBL 0.67%
Natural Gas : $3.04/MMBtu 0.97%
Updated in last 24 hours