X

Sign Up To Our Free Newsletter

Join Now

Thanks for subscribing to our free newsletter!

ERROR

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  • 3 minutes Texas forced to have rolling brown outs. Not from downed power line , but because the wind energy turbines are frozen.
  • 7 minutes Scientists Warn That Filling The Sahara With Solar Panels Is A Bad Idea
  • 11 minutes United States LNG Exports Reach Third Place
  • 15 minutes Joe Biden's Presidency
  • 7 hours IS SAUDI ARABIA SENDING A MESSAGE TO BIDEN
  • 1 day America Makes Plans to Produce Needed Rare Earth Minerals Domestically
  • 11 hours Texas forced to have rolling black outs, primarily because of large declines in output from fossil fuel power plants
  • 1 day U.S. Presidential Elections Status - Electoral Votes
  • 3 days Former BP Exec "Biden not in war against oil" . . Really ?
  • 3 days Here we go - again: plug-in hybrids cost motorists more than what they were told
  • 3 days Texas Supply Chain Massacre
  • 1 day Top Conservative Lawyer Says Trump Can Stand Trial
  • 1 day “Cushing Oil Inventories Are Soaring Again” By Tsvetana Paraskova
  • 3 days An exciting development in EV Aviation: Volocopter
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

Drilling Cutbacks Mean Service Companies Forced to Scrap Rigs

Despite the decline in oil prices, the U.S. is expected to boost production by 300,000 barrels per day in 2015, up to a yearly average of about 9.3 million barrels per day, according to the most recent government estimates.

But the number of oil and gas rigs in operation is already beginning to drop. For the week ending in December 19, the rig count dropped to 1,875 active rigs, down from 1,893 a week earlier. The fall off is an indication that exploration companies are beginning to pare back investments. Pulling back on drilling may result in a lower future production, which could hurt the growth prospects of some oil firms.

However, the slowdown in drilling activity is having a much more immediate and acute effect on a separate set of companies – those supplying the rigs.

Related: Latest Numbers Reveal The Bakken Is Close To Peaking

Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed. That means that when drilling slumps, their profits take an immediate hit. Even worse, exploration companies may see rising profits from existing production as oil prices rebound, but drilling service companies don’t benefit if their drilling contracts had been put on hold or cancelled.

The problem is compounded by the fact that a slew of new offshore oil rigs are set to come into operation – an estimated 200 over the next six years. As Bloomberg reports, these new rigs will mean there could be a surplus of about 140 rigs, meaning offshore oil contractors will have to scrap that many to bring new ones online.

If oil prices stay where they are now – in the neighborhood of $60 per barrel – a deep contraction in shipping rig supply will be inevitable. In 2015, spending on offshore exploration may be slashed by 15 percent, which will mean taking a deep knife to companies providing rigs and contracting. Transocean has already announced that it is idling seven deepwater rigs, along with several other drillships.

However the shakeout may take some time because offshore contractors can resort to using older rigs in order to bring down the rates they are charging, essential to maintaining market share. In order to entice exploration companies to keep up the drilling frenzy, older ships can keep costs lower.

But that may not be a tenable prospect since offshore contractors will feel compelled to put the new and more state-of-the-art rigs into operation. That will force companies with older fleets to start discarding the most dated drilling rigs.

Related: If Shell Backs Out, Arctic Oil Off the Table for Years

Transocean already took a $2.6 billion impairment charge in the third quarter of this year, due to a “decline in the market valuation of the company’s contract drilling services business.” By scrapping more ships, it expects to write down at least $240 million in the fourth quarter. More may be in the offing – Transocean released an update on the status of its fleet in mid-December, confirming its plans to scrap 11 ships. The statement also added that “additional rigs may be identified as candidates for scrapping.”

Perhaps it is Seadrill, another offshore drilling services company, that has taking the worst of the oil price downturn. The company decided to cancel its dividend in November amid falling oil prices, a move that sent its share price tumbling downwards. Seadrill has seen its shares lose almost 75 percent of their value since July.

As with the rest of the industry, the fortunes of offshore drilling services companies depends on the price of oil. However, unlike the oil majors, which have more diversified interests both upstream and downstream, offshore contractors take it on the chin first when oil prices go down.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News