Having struggled through the last decade, how will the collapse in oil prices and emergence of COVID-19 impact the offshore sector?
The offshore segment has faced significant challenges since the mid-2010s. Offshore support vessel (OSV) and rig owners alike were severely hit in mid-2014 when oil prices dropped from over USD 90 a barrel to just over USD 40 in early 2015, only to drop again to the low USD 20s a year later. What resulted was a wave of court-mandated administration and consolidation. For a sector that was beginning to see some signs of recovery, the outbreak of COVID-19 has both a direct and an indirect impact. Directly, the virus pandemic has been causing disruption of operations at oil rigs and vessels, as nationally diverse staff and crew are either found to be infected or are prevented from travelling to or from work from their countries of origin as a result of travel bans. Oil companies have contingency plans in place to prevent the spread of diseases, especially in sensitive and densely populated environments that are offshore oil rigs. So we could assume that, even though problematic, COVID-19 could have a relatively limited direct impact on operations.
The more severe problem, and with longer lasting consequences, however, is the aftershock of the virus outbreak on the price of crude. Lower demand for oil, as economies slow down or shut off completely, and the failure of OPEC+ alliance partners Saudi Arabia and Russia to reach an agreement in terms of production cuts have pushed oil prices down to the low USD 30s in early March 2020 (and is now trading in the USD 20s). This could be exacerbated, with trade media reporting signals from other producing countries to increase oil production (in an effort to offset revenue loss from declining prices), potentially pushing barrel prices into the USD 10s.
While it is too early to say this with certainty (some claim Saudi Arabia’s increased output policy is aimed at bringing Russia back to the negotiating table), a low oil price scenario could lead oil companies to begin to reconsider their capital expenditures and to postpone new oil drilling projects. Capex changes have a delayed effect on demand for oil rigs and OSVs, and could, therefore, add months (if not years) of uncertainty to the segment in terms of fleet employment, daily rates, and, ultimately, revenues. This is especially true for deepwater developments, as these require larger capex and, consequently, more stable oil price outlooks in order for oil companies to pursue investments. As a result, companies dedicated to these markets, i.e. owners/operators with semi-submersibles and drillships or with larger OSVs, are especially susceptible to these changes. Companies (especially drillers) with contract backlogs might not be as severely affected, although even these contracts have not been immune to market deterioration and rate revisions in the past.
The COVID-19 pandemic’s impact on the offshore market would also affect companies’ leverage, debt and overall balance sheets. Numerous listed OSV and rig owners/operators have only recently come out of restructuring, or, in some cases, are still trying to reach a settlement with creditors, such as DOF and Solstad. In a market where already one in four OSVs is reported to be unemployed (regional variations are at play here, with nearly 50% of US Gulf AHTSs laid up, while “only” 12% of North Sea PSVs are stacked), owners desperately trying to sell ships to increase their cash positions and reduce debt burdens could find themselves having to dispose of assets at a discount. Large impairments of vessel values will further weight heavily against results and balance sheets (if there is a silver lining, though, it is that newbuilding output has been reduced as of late due to the virus outbreak in the Asian shipbuilding countries and at their yards). On the liability side, downgrades or payment defaults could lower even more investors and creditors appetite for risk or tolerance with ongoing restructurings. Even if this were not the cause, drilling companies and OSV owners could find it increasingly difficult to secure credit facilities, raise capital, or issue debt (as we have already seen with Fugro earlier this month).
As mentioned, it is still too early to say with certainty, but a persistent reduction in oil demand worldwide as a result of economic shutdown in response to COVID-19 could lead to months, if not years, of subdued demand for rigs and OSVs and disappointing earnings, on the one hand, and increased gearing and reduced capital and credit availability for companies already beleaguered by years of challenging market conditions, on the other.
