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Offshore drillers scrap assets to fit market made smaller by COVID-19 downturn

Offshore drillers are scrapping premium equipment to right-size their fleets amid the downturn brought on by the COVID-19 pandemic, anticipating that addressing the market from the supply side will help improve their positions when the demand side returns.

"The supply side is finally getting some much-needed self-help as we're now seeing offshore drillers elect to scrap/retire a number of higher-quality 6th-gen assets (albeit largely of the cold-stacked variety)," analysts with Tudor Pickering Holt & Co. said June 3.

Sixth-generation semisubmersible offshore drilling rigs, designed in response to increasing oil prices and dayrates in the late 2000s, are among the most advanced rigs in offshore drilling fleets. The rigs can drill in water depths of 10,000 feet or more and are designed for a wide range of operating environments.

Stuart Robert Jackson, CFO of deepwater drilling contractor Seadrill Ltd., said the company would likely scrap some assets that are already cold-stacked, or shut down and stored with minimal staffing and maintenance, since low crude oil prices would limit the returns on the assets and the duration of cold-stacking would elevate reactivation costs. Up to 10 rigs may be scrapped over the coming months, he said.

London-based Valaris plans to "preservation-stack" competitive rigs, including three drillships, a semisubmersible and five jackups, President and CEO Thomas Burke said during an April 30 earnings call. "By putting these rigs into a lower state of readiness, we expect to realize more than $50 million of annualized cost savings beginning in the latter half of this year," Burke said.

The company also will retire three sixth-generation modern drillships, four benign water semisubmersibles and four jackups. Scrapping these 11 rigs is expected to save the company more than $30 million in stacking costs annually once they are sold, the CEO said.

In the Gulf of Mexico alone, roughly $4 billion in investment has been cut from the offshore market in 2020, a 22% reduction from 2019, Wood Mackenzie analysts said June 4. The analysts expect $7.4 billion in spending in the Gulf of Mexico, 35% below pre-COVID-19 projections.

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After years of oversupply, the smaller fleet sizes should allow offshore drillers to regain pricing leverage. More equitable returns could help them tackle walls of debt maturities that threaten even the largest companies in the sector.

Rystad Energy analysts said in an April 9 note that unless offshore drillers and vessel providers make sufficient spending cuts, most will be unable to pay their total outstanding 2020 debt.

Valaris already elected not to make a June 1 interest payment on its 4.875% 2022 notes and its 5.4% 2042 notes. "Valaris was granted a waiver by revolver lenders for the June 1 & June 15 interest payments — without this [the company] would technically have defaulted on the facility," Credit Suisse analyst Jacob Lundberg said June 5.

Conversations around debt restructuring are ongoing, according to Valaris.

At Seadrill, Jackson said the company would not progress with an interim solution to its debt reduction issues and would move directly to a comprehensive restructuring.

Lundberg said that from February to May, the average active floating rig count tumbled 25% from 123 to 93 working floaters, including semisubmersibles and drillships. The addition of three rigs each in the North Sea and the Asia Pacific from mid-May to early June was slightly encouraging, while it was discouraging to see 7G drillships slip by two in May to 28, Lundberg said.

"It remains to be seen if May will have marked the bottom in working floaters," Lundberg said.

The share price of offshore drilling companies surged on the NYSE on June 8 as an oil price recovery to about $40 per barrel suggested exploration and production activity could be stoked. Shares were up roughly 161% on the day at Noble Corp. PLC, about 135% at Valaris PLC, 131% at Seadrill Ltd. and 50% at Transocean Ltd.

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