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Seadrill, Citi Predict Weak Offshore Sector Through 2017

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By MarEx 2016-01-15 10:36:39

In separate reports Thursday, the CEO of rig operator Seadrill and market analysts with Citigroup said that they expect a weak market in the offshore sector through 2017 as low crude prices and cost cuts continue to push day rates below the break-even point.

Rig owners have lately been forced to mothball or scrap drilling units to fight a rising supply glut as decade-low oil prices have caused a plunge in demand for exploration rigs.

"We have to save more and more money. That's the main thing we can do. It's worrying when we see the oil price falling as it does now because once the oil price is starting to return to normal you can add 12 to 15 months before you see the need for additional rig units," Seadrill CEO Per Wullf told media.

"With an oil price around 30 dollars there is very little appetite amongst oil companies to explore and drill for oil," he added. Wullf said he expected 2017 to remain difficult and that there was not enough new work to replace old contracts when they expire.

Even worse, thanks to the expense of cold stacking rigs, “we are forced to agree some contracts at below cost," Wullf said.

Billionaire investor John Fredriksen is Seadrill's top owner with a 24 percent stake. 

Citigroup VP of Equity Research Mukhtar Garadaghi is also bearish on offshore contractors. In a research note published Thursday, he suggested that the industry is undergoing structural change and will not see improved numbers for years.

“We see development sizes in deep water shrinking by up to 50% through simplification, standardization, technology and focus on smaller, short-cycle solutions. For the offshore supply chain, this means lower top lines and likely weaker margins even as activity recovers post-2017,” his team said. “For offshore-focused oilfield services, this lowers top-line and margins potential even as activity recovers, in our view. We argue that volumes are unlikely to offset the 50% decline in award sizes, while standardization and sustained supply chain overcapacity will also pressure margins.”