Offshore Drilling Market Not Turning Around Yet

Research consultancy Maritime Strategies International (MSI) has forecast a challenging earnings environment for the offshore rig market during the next two years.

In the first of its new quarterly sector reports, MSI compares the current market to the slump of the 1980s. Its data model shows the rig market to be in an even deeper hole than 30 years ago, with fleet utilization and the supply/demand balance a cause for caution on the earnings outlook.

This is despite a palpable shift of sentiment in the jackup rig market, with recent deals such as Borr Drilling’s takeout of the Transocean jackup fleet and two modern Hercules jackups establishing solid price expectations and for many marking a bottom to the market.

“The question we have considered is whether this recent activity heralds the beginnings of a broad-based industry turnaround and our conclusion is not just yet - at least for some market sectors,” says MSI Senior Analyst James Frew. “This is not least because rig earnings are not simply a function of the oil price but also the fleet utilization. Factoring in the supply/demand balance provides further evidence of why MSI are more cautious.”

In 1986, earnings for a third generation semi-submersible slipped below $50,000/day (and had been falling since their 1981 peak at around $90,000/day) while earnings remained below the $50,000/day mark for the remainder of the decade. Like today, there were shards of optimism amongst the pain – day rates went up by 10 percent in 1989 – but overall it remained a bleak market.

Today, global floater utilization is currently below 50 percent, whereas in the 1980s the utilization rate only dipped below 70 percent for two years. Even excluding cold-stacked rigs from the analysis, utilization rates in the floater market for 2017/18 remain below the levels seen in 1987/88.

If demand increases, the pool of ready-stacked rigs is intimidating even if cold-stacked rigs are excluded (15 percent of floaters are cold-stacked, whilst nearly a third are ready stacked).

Jack-up rigs are also suffering, but have slightly more favorable dynamics largely because their biggest market – the Middle East – has scarcely seen any reduction in rig activity. Jack-up utilization has held up better at around 60 percent, whilst cold stacked jack-ups represent only 12 percent of the fleet.
 
“Overall MSI believes that the rig market is not yet out of the woods,” adds Frew. “We expect day rates for a Sixth Generation semi-submersible to average around $170,00/day in 2017 – down about five percent relative to 2016 levels – rising to a shade under $190,000/day on average in 2018. More positively, by 2020 our projection show day rates rising to over $300,000/day.”

Modern jack-ups will outperform floaters over the next three years, as they are propped up by demand from national oil companies in the Middle East and South East Asia, but will also see earnings at disappointing levels.