Offshore drilling major Valaris became the latest victim of the crisis this week as it filed for bankruptcy in the U.S., proposing a swap of some $6.5 billion in debt that will see creditors become its owners. But it is just the latest headache for offshore drillers. There is more than $20 billion in offshore drillers' debt still out there—and there are not many new drilling contracts.
This considerable debt pile is bad news. Expectations that offshore drilling orders will not begin to return until 2021 is even worse news. Nevertheless, this is what IHS Markit analysts have forecast.
In a recent report, IHS Markit said that demand for drilling rigs would start to recover next year and gather speed in 2022. But this will only happen in some parts of the world, namely South America and Western Africa. Demand for offshore rigs in the Gulf of Mexico will remain subdued, IHS Markit's analysts said.
Meanwhile, some of the largest offshore drillers are folding. Diamond Offshore Drilling was first, filing for Chapter 11 protection in April after collapsing under the weight of $20 oil. With a debt pile of $2.6 billion, according to the Financial Times, Diamond Drilling said the move was motivated by the unprecedented oil price crash, saying in its filing that conditions in the oil industry had "worsened precipitously in recent months."
Then Noble Corp filed for bankruptcy protection earlier this month. The filing followed the company's inability to make an interest payment on a loan. The interest payment was for $15 million. Noble's total debt burden was $4 billion.
There is some $30 billion of debt in the offshore drilling industry at risk of default, Bloomberg reported this week. And while some players in the field such as global leader Transocean are looking for restructuring options to avoid bankruptcy, others will follow Noble Corp, Valaris, and Diamond Offshore. Some analysts believe this will be good for the industry.
"Offshore drilling is structurally damaged, and recovery is not imminent," Nicholas Green from Bernstein wrote in a note cited by Bloomberg. "The March oil price crash may, ironically, help to drive an eventual turnaround, if it forces sector restructuring and clear out of the weakest names."
Perhaps it is high time for such a clearance in offshore drilling. The sector was among the hardest hit by the previous crisis, along with oilfield services providers, and it never managed to recover before the Saudi-Russian price war and the pandemic struck it down again.
Now, as E&Ps struggle to survive and cut all costs that they can, expensive offshore drilling plans are front and center in their cost-cutting plans. No wonder then that offshore drillers are going under at the fastest pace since 2017, Bloomberg's David Wethe said in a separate report.
More bad news may be on the way. Although some expect a reversal of fortunes for offshore drillers soon, it remains to be seen just how full this reversal will be. The previous crisis made the industry wary of lavish spending on new projects; this may strengthen the attitude as it remains uncertain that oil demand will ever return to pre-pandemic levels. So most exploration and production companies are keeping the strings on their purses tightened, spending only on essentials.
All in all, the majority of offshore drillers may need to visit bankruptcy court at some point in the not-too-distant future, according to analysts cited by Bloomberg's Allison McNeely in her analysis of the industry's situation. They will need to restructure, consolidate, and adjust themselves to the new price environment. A return to the good old days of $100 oil is not on the foreseeable horizon.
By Irina Slav for Oilprice.com
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