Deepwater Sector In Deep Trouble
A Deluge of Bankruptcies
Across the energy sector, more than 40 companies filed for Chapter 11 bankruptcy protection last year. Alam noted that the early December bankruptcy of international offshore drilling contractor Vantage Drilling Co.’s bankruptcy is evidence of what happens when a company is overburdened by their own debt.
In Vantage’s case, the company had three drillships and four jackups, each built within the last five years at an average cost of around $650 million per drillship and $225 million per jackup, Alam said. In today’s market, those drillships are probably worth between $300 million and $350 million, about half as much as they cost to build. Jackups likely haven’t fared as poorly, but still, they’re probably worth less than $150 million each. In addition, Vantage had a significant amount of debt, Alam said.
“So what’s going to happen is essentially the debt holders are going to become equity holders after taking a significant loss. A lot of these over-levered companies will probably file for bankruptcy and if that debt goes away, maybe there will be an interested buyer for the rigs,” he said. “But at their current level of debt, there is not a lot of interest.”
Consolidation in a down market is a natural progression, Alam said, last seen in earnest in the 2010 down cycle.
“Most rig companies feel the earnings prospects look weak, and it’s not going to improve in the near future. Unless there is a deep, deep discount, [another company] is not going to volunteer to acquire that rig. Everybody is holding back for prices to come down even more. A lot of these rig companies – they have attractive assets, but they also have a lot of debt … because equipment is so expensive,” he explained.
A couple of weeks after Vantage filed for bankruptcy, it was Norway’s Dolphin Group ASA, an offshore seismic survey company for the oil and gas industry, heading to the bankruptcy courts.
There’s no question that offshore drilling is tough, and while some producers have managed to shore up their balance sheets, it’s a mixed bag for service providers, West said.
“It’s a question mark in our minds for the supply vessel companies, maybe not so much for the U.S. based ones, but some of the Norwegian companies and some of the Asian companies, are likely to go out of business,” he said.
The global market is oversupplied by about a million barrels per day, but that could turn around by the end of the year if U.S. shale production cuts down, West said. Already, supply appears to be dwindling in 2016, he said, hinting at a balance between ever-important supply and demand and giving a bounce to oil prices. That will put rigs onshore back online, but deepwater will likely be the last of the rig population to return to work.
“We could look at a recovery for deep demand materializing in late ‘17, or early ‘18 but I don’t see it before that,” West said.
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