Back in 2014, no one could have anticipated the worst crisis the offshore industry has ever seen. Investments by oil majors and international and national oil companies were revised and cut globally. But is the worst over for offshore?
Between June 2014 and January 2016, the price of a barrel of Brent crude fell from nearly USD 120 to just over USD 30, a drop of 75%. A number of factors contributed to this decline:
- The slowdown of economic growth in China and other large emerging economies.
- Efforts in the United States and other countries to diversify their energy matrix and limit their dependence on imported oil and the price dictated by OPEC (leading, for instance to the so-called ‘fracking revolution’).
- Saudi Arabia’s decision to allow the price of the oil to drop rather than cede market share by cutting production (which ultimately forced the US and Canada to abandon the more costly production methods).
In Brazil, the crisis was exacerbated by the Car Wash corruption scandal, which saw a number of senior executives at the state-controlled oil company, Petrobras, jailed. As a result, investments by oil majors and international and national oil companies were revised and cut around the globe.
Offshore crisis prompts global investment cuts
By early 2016, over USD 220bn in capital expenditures by these companies had been axed, with estimates that some USD 1.5trn of potential investments could run out of cash to move forward; more recent estimates suggest that the capex in the sector is down between 30% and 40% compared with pre-2014 levels.
Whilst the need to sustain reserves forces oil companies to maintain a minimum investment in exploration, as far as offshore is concerned, focus shifted from deep and ultra-deepwater projects to campaigns in shallower waters, where drilling and production costs are lower.
In the offshore segment, the main victims of these investment cuts were the offshore contractors, drill rig operators, and offshore support vessel owners
In the offshore segment, the main victims of these investment cuts were, of course, the service providers. This included offshore contractors, drill rig operators, and offshore support vessel owners, which, having built up expensive and sophisticated fleets in anticipation of a continuation of a high oil price environment, instead experienced a significant decline in demand and an oversupply of tonnage in areas such as offshore Brazil and the North Sea.
Some units were repositioned to West Africa, the Middle East and Southeast Asia, only to find themselves competing with the local fleets, further contributing to the oversupply of vessels and the drop in day rates. Rig and OSV operators alike saw a dramatic drop in fleet utilisation, which, to this day, can be as low as 50%.
What followed was a tsunami of stacking of ships and rigs and staff being laid off. For many companies, the only options included the following:
- Consolidation: Farstad, Solstad, and John Fredriksen’s Deep Sea Supply (merged to form SolstadFarstad in 2017), and Tidewater and Gulfmark (the merger of which is due to be voted by shareholders in November 2018).
- Divestments: the A.P. Moller-Maersk group (which sold off its oil and gas exploration and production unit, Maersk Oil, to French major Total S.A., and is now working towards spinning off and listing its drilling arm, Maersk Drilling, by as early as 2019, and its OSV business, Maersk Supply Service, thereafter).
- Corporate/debt restructurings: accommodation rig operator Prosafe (successfully completing its debt restructuring in November 2016), and French OSV owner/operator Bourbon (which succeeded in renegotiating its debt with lenders, who have — so far — tolerated breaches of covenants, although perhaps only because the latter group would rather leave the businesses intact and operational than to take over and sell assets at presently depressed market levels).
- Court protection: the aforementioned Tidewater (which came out of Chapter 11 proceedings in July 2017), Seadrill, another John Fredriksen outfit, which filed for Chapter 11 restructuring in September 2017 (facing significant opposition from certain unsecured bondholders), Ocean Rig (which underwent a massive restructuring between 2016 and 2017 and is now in merger talks with Transocean), and Toisa (which filed for Chapter 11 in January 2017 and is now in the process of liquidating assets).
- Liquidation: Swiber Offshore Ltd, which filed for liquidation in July 2016.
Since mid-2017, the price of crude oil has been on the rise (with the Brent trading above USD 80 a barrel at the time of writing), and quiet optimism seems to have taken over the gloomy forecasts published in annual reports and discussed in investor conference calls barely a year ago.
That said, the offshore industry is a late cyclical one, with potentially years before any improvement and stability in the price of oil is reflected in a verifiable recovery of the segment. It also remains true that a vast portion of the OSV and rig fleet remain stacked (many of the ships concerned appear unlikely to ever return to active duty). Even so, overcapacity still plagues the markets.
Oil companies seem to have adapted too, with projects redesigned to reduce complexity and the need for large workforces whilst negotiating more favourable terms with contractors, drilling and OSV companies
Oil companies seem to have adapted too, with projects redesigned to reduce complexity and the need for large workforces whilst negotiating more favourable terms with contractors, drilling and OSV companies. Moreover, oil companies appear to be favouring charters with shorter durations, which, for the rig and OSV operators (and, in turn, creditors and lenders), means a greater challenge in calculating cash flow, given the increased exposure to the spot market.
What does the future hold for the offshore sector?
Is the worst over for offshore? Maybe. The improvement in the price of oil means that at least the oil companies will be looking to pick up their exploration and developments capex in the next few years. But demand for drill rigs and OSVs is still subdued, and there is still a sizeable fleet laid up, pressuring day rates.
Whilst some rig and vessel operators may be in a more comfortable position than their peers (if only after having gone through a painful restructuring themselves), it is likely that they are still struggling to cover their operating and debt-servicing costs. Other companies that have yet to go through their own merger or restructuring (or worse) offer a much greater level of uncertainty, with the next steps taken by these entities having a massively varying impact on their creditors (large and small alike). Ultimately, for an industry that specialises in deep water, there is still a long way to go on its path out of the abyss.
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