In a report released Monday, analysts Douglas Westwood highlighted the pressures facing the offshore supply chain – OSV firms, subsea construction operators, rig owners and others – as oil and gas companies take a hit from exceptionally low oil prices.
Offshore firms with a need for scarce, highly specialized labor – for example, DP- qualified officers or skilled pipelaying crews – often do not want to lay off their staff for fear that they may not be able to get them back again once the market improves. Labor costs have only come down by about 10 percent, compared to 30 percent cuts in repairs, maintenance and general overhead, limiting the degree to which service firms can reduce their expenditures, DW said.
On the revenue side, rates for all types of vessels and platforms are significantly down due to overcapacity, by as much as half to two thirds, meaning that many service providers are operating at a loss. This is a big win for oil and gas companies – they are effectively getting a subsidy from their contractors – but it means that there will be a long struggle ahead for offshore supply, rig and subsea firms until demand picks up or scrapping takes supply down. Many financial analysts forecast that market improvements may not come until late 2017 or later.
Adaptation strategies vary among firms. Seadrill, Marco Polo and other rig owners have canceled shipyard contracts for new floaters and jackups; Diamond Offshore Drilling has entered a creative sale-leaseback arrangement with GE for the ownership and maintenance of its mission-critical blowout preventers; some OSV and subsea firms like Eidesvik Offshore have diversified into offshore wind; and many companies from all offshore service sectors have resorted to a greater or lesser number of layoffs. DW suggests that vertical integration may help build scale for some, and outsourcing may help to reduce costs.
For firms with access to capital, the downturn is also an opportunity for consolidation and purchasing. Several ventures – like Blackstone affiliate Clarion Offshore Partners and Fredriksen-backed Sandbox – have been formed specifically to assist or acquire offshore companies and their assets.