Emerging signs of offshore market improvement – WorkBoat (blog)

Information from the front lines of the offshore market drilling company marketing departments suggest that contracting activity is improving. We were treated to various drilling company CEO commentary about the market outlook, along with explanations about adjusting corporate strategies, during their recent earnings conference calls. Some comments were directed to strategy shift updates already underway, while other comments focused on the need for companies to rationalize rig fleets in order to be positioned for the upcoming industry recovery.

So when is the market recovery coming? According to Diamond Offshore Drilling Inc. CEO Marc Edwards, Were looking at a recovery that is probably the back-end of 2019, in terms of not only utilization ticking back up but also looking at a time when pricing power might return in our space.

This view was essentially echoed by Ensco PLCs CEO Carl Trowell, when he told analysts. We expect that the recovery in the offshore sector will be prolonged and paced. While less defined than Edwards timetable, Trowell also pointed out that More projects have reached final investment decision sanction this year than we did for all of 2016, providing a pipeline of future offshore work in the years ahead.

Those observations are consistent with a slow and steady recovery from the worst industry depression in history. This downturn, combined with its slow recovery, has forced every energy company to reassess, and in most cases, adjust its corporate strategy. Both Diamond Offshore and Ensco have acted, and plan further steps to position themselves for maximum returns as the industry recovery unfolds.

A frank assessment of the need for offshore companies to adjust their strategies was offered by Trowell. Acknowledging that the downturn will reconfigure the offshore drilling industry, he suggested successful drilling contractors must be well capitalized as well as possessing the technology, systems, scale, and diversification to help customers lower their development costs.

Ultimately, lower offshore costs is the key condition to be achieved by the industry before a healthy recovery can be sustained. A recent study by Wood Mackenzie pointed out that the offshore well breakeven prices are now down to $50 a barrel, meaning that at current oil prices, producers are essentially trading dollars, but banking on higher prices or lower costs in the future. That scenario, however, is better than past conditions when producers would have been losing $20-$30 a barrel.

Lower drilling rig, supply vessel and service company prices have been part of the equation for lower breakeven prices, but technology is another significant contributor, and one that has greater sustainability. Edwards, of Diamond Offshore, pointed to the early success of his companys partnership with General Electric to deliver pressure control by the hour service. He highlighted that this unique contract helped boost the revenue efficiency of Diamond Offshores black rigs by over 300 basis points quarter over quarter. As evidence, he cited drilling a well in the Gulf of Mexico to 31,000, 30% faster than planned, which contributed to better returns for his customer.

Offshore companies are making significant progress in reducing costs, shrinking fleets and promoting new technologies that will contribute to improved returns for their customers. It should also be rewarding for the service companies, too. As we near a market tipping point, the recovery will begin accelerating. The leading drilling contractors may be sensing the tipping point drawing near.

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Emerging signs of offshore market improvement - WorkBoat (blog)