Offshore Rig Count Drops, and Forecasts Follow

Baker Hughes released its January numbers for active rig counts Friday, including a breakdown for offshore drilling, and the results are discouraging: for January 2016, the worldwide offshore rig count was at 242, down by more than one fifth from a year ago.

The rig count joins a string of negative announcements issued this week. Analysts with Bloomberg Intelligence said in a report released Thursday that offshore rig operators will see sales 25 percent lower this year and another 10 percent lower in 2017. Analyst Praveen Narra of Raymond James concurred in a report Monday, describing the outlook as one of “unrelenting oversupply.” His team forecast a demand drop of 20 percent this year and 15 percent in 2017, with an insufficient pace of scrapping or cold stacking to rebalance the market.

Fitch downgraded Transocean on Thursday and cut its outlook for the firm to negative, based on a prediction of a longer low activity period for rig operators: even if Brent futures rise, changes in the market for offshore drilling contracts could lag oil price improvements by as much as one year, the agency said.

"Fitch has pushed back its recovery inflection point estimate into the second half of 2018 from late 2017/early 2018," Fitch said. "A recovery to more robust operating and financial metrics is not likely to happen until after that point."

Barclays' David Anderson concurred Tuesday in announcing a sharp cut in the firms' valuations of rig operators. “Given the dramatic decline in the oil price and continued negative data points that point toward a prolonged downturn for offshore drillers, we reduce our normalized day rate assumption, resulting in valuations for all offshore drillers in our coverage being lowered by an average of ~50 percent,” Anderson said.

But some oil majors are still hiring the latest, most sophisticated rigs to push ahead with ambitious projects. Total's offshore Uruguay block 14 has sparked investor interest as a significant countercyclical investment. Drilling on the project is due to commence in several weeks, in some of the deepest water depths ever attempted – 3,400 meters – entailing potentially high costs. But Total’s Uruguay lease has attracted votes of confidence wih big recent buy-ins, with a 35 percent stake sold to ExxonMobil in November and a 15 percent stake to Statoil in February. Rig operator Maersk Drilling has contracted its 2014-built Maersk Venturer for the project.