Image: Semisubmersible Songa Delta.

Investment thesis:

The recent oil prices increase that we have experienced since OPEC and non-OPEC nations decided to reduce production at the end of last year, is slowly trickling down from the oil majors, such as Statoil, to the depressed offshore industry, which is desperate to find work for an ever growing unused fleet rusting away, idle and silent, in the Scottish Cromarty Firth, north of Inverness, graveyard (See image below).

The Cromarty Firth, north of Inverness, is currently packed with more unused rigs than it has been at any point in the last decade.

I have been religiously reporting any new contract or possible drilling contract that could be beneficial for the offshore drillers for the past two years, and it is quite disheartening to see such a slowdown in exploration CapEx, when you know how active this segment was, not even three to four years ago..

Yes, of course, we know that the offshore industry, or rather the oil industry in general is highly cyclical and it will come a time when the industry will complain because it cannot keep up with the demand.

However, the offshore drilling industry is a particular breed, for one particular specific reason, at least, and it is called a debt overload. Offshore drillers are buried under a few billion dollars in debt and need to contract their costly fleet to survive and meet their tight debt covenants.

Regrettably, it is becoming increasingly difficult because of the lack of contract aggravated by a series of contract termination and reduced day rates to a breakeven level, which are inadequate to service the long term debt.

This basic principal reduces significantly the "apnea time" in which a driller can survive without breathing air (new contract). Already, many drillers have announced a restructuring under chapter 11 or worse a total liquidation. Hercules offshore is gone, liquidated almost totally now, and Paragon Offshore (OTCPK:PGNPQ) is on life support following the same potential fate.

Many others are about to announce a restructuring in 2017, such as Seadrill (NYSE:SDRL), Pacific Drilling (NYSE:PACD) and Ocean Rig UDW (NASDAQ:ORIG). These companies already announced that a "plan" will be unveiled soon.

Well, it doesn't mean that the industry will disappear, of course not, and many uninformed investors have made this wrong assumption repeatedly.

It means that the offshore industry is shedding away its "old skin" to become leaner (the debt will be gone, replaced by new equity) and smaller (many rigs will be scrapped in the process) for the next bullish phase. The only negative is that the actual shareholders will be left with the "old skin".

Investors and stockholders will have to follow closely this struggling industry based on the price of oil volatility and other factors such as potential contracts. The question is not to deny or embellish a situation, it is rather to adjust the right trading/investing strategy that fits an ever changing environment which requires an impartial examination.

Commentary:

On February 17, 2017, we learned from OffshoreEnergyToday the following:

Oil giant Statoil is currently looking for a drilling rig as it gears up to drill an exploration well on the Verbier prospect in the UK sector of the North Sea.

The Verbier prospect is located in Licence P.2170, Blocks 20/5b & 21/1d in the Central North Sea and is operated by Statoil's UK subsidiary, Statoil (U.K.) Limited, with 70% working interest.

The partners in the license are Jersey Oil & Gas and CIECO Exploration and Production with 18% and 12% interests, respectively.

Statoil, as the operator of the license, made a commitment to drill the exploration well in November last year.

According to Jersey's statement on Friday, Statoil is currently undertaking a tender process for a drilling rig and all related services to drill the Verbier well this summer. The rig contract is expected to be awarded in the near future, Jersey O&G added.

Jersey O&G also said that, in addition to Statoil's work, it is conducting further technical studies to improve and update the group's understanding of the Verbier prospect...

... Additionally, pursuant to the terms of the farm-out, Statoil is funding all costs up to $25 million in respect to the drilling of the first exploration well on the license.

In the same article, we learned also that another well will be drilled in another part.

Related to its other license in the North Sea, the Licence P.1989 Blocks 14/11, 12 & 16, Jersey O&G also said on Friday that Azinor Catalyst Limited has stated its intention to drill an exploration well the Partridge prospect, previously named Homer, later this year. Jersey has 20% working interest in the license...

Conclusion:

The offshore industry is walking a thin line right now, between "life and death". Yet, I believe strongly that it is a strategical mistake to look at the sector as a non-potential investment.

The only paramount question is how, not if. As an investor and trader you have the chance to get the best of any situation, as long as you are willing to understand it honestly, and without being blinded by pre-judgement. Offshore is not dead and it will rebound.

Companies like Transocean (NYSE:RIG), Ensco (NYSE:ESV), Noble (NYSE:NE), Diamond Offshore (NYSE:DO) and Rowan Companies (NYSE:RDC) are a few that can be considered as a long-term opportunity when the time will be right.

Rystad Energy is explaining clearly:

However, with two years of cost cutting programs in the offshore value chain, 2016 and 2017 are showing full competitiveness within these two sources of supply. This shows what the offshore industry has worked with during the downturn. In a time when many thought that offshore projects could not compete with shale, offshore operators managed to turn uncommercial projects into highly competitive projects with the help from service companies. Offshore projects that were uncommercial at $110/bbl in 2013 are now commercial at an oil price of $50/bbl.

Sometimes it is important to move through a reversal of fortune because, like the phoenix the industry will be rising again from its own ashes. Thus, be patient and vigilant for the early signs.

Inportant note: Do not forget to follow me on the offshore drilling industry. Thank you for your support.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade and own long positions in the offshore drilling segment.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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Offshore Drilling - 2 Floaters Needed In The Verbier Field And In The Partridge Prospect In UK North Sea - Seeking Alpha