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Slow market recovery hangs over some offshore drillers holding on for dear life

Offshore drillers are capitalizing on new business opportunities emerging as an offshore market recovery unfolds, but the slow pace of the recovery has left some debt-laden drillers treading water in hopes of broader market growth.

There are clear signs that the offshore market is returning. In North America, Baker Hughes' weekly data showed 22 rigs operating in the Gulf of Mexico in the week to Dec. 6, steady for the fourth consecutive week and down by one from the same week in 2018.

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Baker Hughes' monthly international offshore rig count data showed 247 rigs operating in international waters, up by five from the 242 counted in October and up by 41 from the 206 counted in November 2018.

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During a third-quarter earnings call in October, Jeremy Thigpen, president and CEO of Switzerland-based Transocean Ltd., said the company had identified 90 likely programs for its floating rigs that span about 64 rig years. The duration of contracts has lengthened, and opportunities in multiple markets in both the ultra-deepwater and harsh environments are at or above the number of marketable rigs available, Thigpen said.

"As such, we anticipate new contracts to reflect materially increased day rates, which will generate significantly improved cash flow," Thigpen said.

Houston-based NexTier Oilfield Solutions Inc., formed through the merger of C&J Energy Services Inc. and Keane Group Inc., is also doing well in a new world where offshore drilling is making a comeback. The company is cash flow positive and poised to give back to its shareholders, NexTier President and CEO Robert Drummond said.

NexTier announced Dec. 11 that its board of directors approved a capital return program of up to $100 million through Dec. 31, 2020, including repurchasing up to $50 million of the company's common stock.

Other offshore drillers, including Valaris PLC and Diamond Offshore Drilling Inc., are taking steps to defend their positions and hold on for a more significant market recovery.

Amid the market improvement, Valaris announced Nov. 25 a series of new contracts and contract extensions, with associated revenue backlog of about $285 million.

But the London-based company, formed through the merger of Ensco PLC and Rowan Co., is in a battle with Luminus Management LLC, the investment adviser to funds and accounts that own about 18.7% of Valaris' equity. Luminus claims $11 billion in shareholder value and $3 billion of bondholder value has been lost as the result of "persistent strategic, operational and governance failure" at the company.

Defending itself against the allegations, Valaris said its board and management team are focused on delivering merger-related synergies and additional cost savings as well as optimizing its capital structure. "We believe the company is well-positioned for the anticipated market recovery," Valaris said.

Diamond Offshore Drilling, meanwhile, is among a string of offshore drillers to face investment downgrades as they struggle with substantial debt.

The company had a debt to equity ratio of 0.6 for the three months ending Sept. 30. The ratio is calculated by dividing long-term debt by stockholders' equity, and it measures financial leverage. A debt ratio of 0.6 or higher makes it more difficult to borrow money, according to investment researchers at Macrotrends.

Despite the challenges, there is a promise of ongoing market growth and hope for offshore drillers.

As U.S. incremental contributions to world production decline, non-U.S. production will be required to fill the gap, equating to more growth in international and offshore markets, Jeffrey Miller, CEO of oilfield services major Halliburton Co., said during the company's Oct. 21 earnings call.

Yet a sustained sector recovery depends on supportive crude oil prices, higher rig attrition, and the industry's ability to continue lowering costs and improving efficiency, according to S&P Global Ratings.

The rating agency in October pushed back its forecast for an offshore market recovery to 2021, when it projects day rates will improve to about $250,000 per day, "with some variation depending on the rig quality and location."