Ending offshore rig owners' bankruptcy nightmare requires a lot more scrapping
Valaris, Saipem, Transocean, Borr, Diamond, Shelf, Seadrill, Noble… just some of the drilling contractors that have scrapped or are planning to scrap excess rig tonnage this year. The double whammy of Covid and the weakened oil price has accelerated drillers’ desire and need to rid themselves of superfluous assets and, according to Bassoe Analytics, so far this year there have been 11 jackup and 11 floater (drillships and semisubs) sales finalized (see Figure 1) for recycling or conversion, which will be permanently removed from the competitive drilling fleet – good news for the heavily oversupplied market, especially just now with such muted demand. Additionally, Bassoe Analytics is aware of a further 22 semisubs, 2 drillships and 12 jackups that are either in discussion for sale or are close to having sales finalized.
Figure 1: 2020 offshore rig sales for recycling or conversion purposes; (Source: Bassoe Analytics)
However, if some form of balance is to return to supply and demand (and ultimately utilization) a lot more rigs need to be removed from the active fleet, this time around only scrapping those that have been sitting cold stacked and uncompetitive for years won’t cut it. Although retiring cold-stacked rigs can only be a viewed as positive in the current climate, these units are not typically being marketed for work and are not considered competitive. In most cases it would take several months and a lot of cash to ready such a rig for a drilling campaign.
Therefore, marketed supply (units that are working or are warm/hot stacked) is what needs to shrink if near-term balance in the competitive offshore rig market is to be achieved. Some drillers have already scrapped marketed rigs this year, and they need to do more of it if they want to operate in a balanced market and avoid another round of restructurings in the future.
What would it take to reach 85% marketed utilization?
Figure 2 and Figure 3 below show scenarios of what it could take to reach 85% jackup and semisub marketed utilization, which is generally the level it should be at for there to be enough upward movement in day rates to make the business profitable again. The scenarios assume a very modest growth in demand of around 5% from current levels through the next 12 months and then highlight exactly how many units would need to be removed from the active fleets (through scrapping or cold stacking) to reach that target utilization. Under-construction rig deliveries have not been included as we believe that very few (if any) are likely to be delivered in the next 12 months, even if demand increases and the fleet sizes decrease.
Figure 2: Fleet reduction required to reach 85% marketed jackup utilization (Source: Bassoe Analytics)
The jackup market is currently sitting at 68% marketed contracted utilization, which is down from the 77% recorded during March and the pre-Covid/oil price crash and if no new awards or attrition takes place within the segment, utilization could reach the 32% mark by this time next year. Based on our new demand assumptions, it would take the removal of a further 65 units from the competitive fleet to reach the target level of 85%. On a side note, to reach 85% total utilization (which includes cold-stacked rigs) that would mean the removal of 126 jackups from the overall fleet.
Figure 3: Fleet reduction required to reach 85% marketed floater utilization (Source: Bassoe Analytics)
The smaller floating-rig segment would need less removals to reach the targeted utilization. This market is currently sitting at 63% marketed contracted utilization, down from 70% during March. Figure 3 shows that only 35 units would need to be removed from the marketed fleet (along with maintained demand) to hit the 85% utilization; however it would take the removal of 88 units from the total floater fleet, including cold-stacked units, to bring total fleet utilization up to 85
Which rigs could get the cut?
Figure 4 below shows a breakdown of the potential candidates for removal from the fleet over the next 12 months. These have been split into three segments illustrating those that are warm or hot-stacked with no future work in place, those that are currently working but will roll off hire in the next 12 months and do not have follow-on work in place, and those that are already cold stacked. The first two segments include only units that are over 10 years old for floaters or 15 years old for jackups, which may seem rather premature but so far this year we have already heard news of units younger than this heading for the scrap heap. It appears that there are enough candidates within the drilling and warm-stack segments to cover the 65 jackups and 35 floaters needed to be eliminated to help aid oversupply.
Figure 4: Potential jackup and floater retirement candidates (Source: Bassoe Analytics)
The rig candidates are certainly there but it would likely be difficult to scrap so many rigs over a short space of time. This is due to a combination of factors including limited yards and companies that deal with rig scrapping, coupled with the lengthy bureaucracy behind recycling a rig in an environmentally friendly manner.
If drillers want to exist 3 or 4 years from now they need to start cleaning up
The Covid pandemic and oil price challenges have meant that hopes for a surge in offshore rig demand have once again been dashed. In addition, the energy transition and diminishing reliance on fossil fuels will also dampen future rig needs. Now appears to be time to stop relying on an unrealistic flood of demand to solve overcapacity within this market. We must assume a lower demand forecast going forward and drillers should try to respond to this with leaner fleets to match.
We are already witnessing more preference for “greener” rigs, which are typically more modern and/or have often undergone upgrades to help lower carbon emissions or to help them drill faster and smarter, lowering non-productive time. It may be the case that the competitive fleet could shrink anyway because of this growing trend, as older rigs are unlikely to be worth upgrading to meet stricter environmental requirements. This is another argument for rig owners to reduce their fleets now and focus on adapting their best rigs for the changing market.
Dayrates are unlikely to reach the highs seen pre-2014 oil price crash but they must somehow recover to a level that can generate “investor-friendly” amounts of cash and support longevity. This can only come about through higher utilization. Several drilling contractors are already going through restructuring (many not for the first time) and if they do not want to go through all of this again they must up their efforts to slash their fleets. The main focus during the refinancing process should be removing older, excess tonnage to rebalance supply and demand and to achieve higher utilization and dayrates, which would be the best solution for creditors as well as drillers.
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Data: Bassoe Analytics, Image attribution: Bassoe Offshore.
