HOUSTON: Transocean, owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an industry-wide glut in the expensive vessels just as crude prices tumble.
The company will delay posting third-quarter results after saying earnings would be hit by $2.76bn in charges from a decline in the value of its contracts-drilling business and a drop in rig-use fees, Vernier, Switzerland-based Transocean said.
Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, which would further reduce demand for rigs and the rates Transocean can charge to lease them to explorers. The drop in prices comes after rig contractors responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s.
“Ouch,” analysts from Tudor Pickering Holt & Co wrote in a note to investors on Friday. The announcement “reflects the reality of this oversupplied floater rig market globally”.
The problem isn’t limited to Transocean — other rig owners may also face writedowns, Waqar Syed, an analyst at Goldman Sachs Group Inc, wrote in a note to investors. Among those that may be affected are Diamond Offshore Drilling Inc, Noble Corp, Ensco Plc, Rowan Companies Plc and Atwood Oceanics Inc, he wrote.
“This is going to be an industry-wide phenomenon for the next few years,” Syed wrote. “Companies that have spent substantial amounts in the past 10-15 years in upgrading their 1970-1980 vintage rigs may face some writedowns.”
Noble regularly does impairment tests on its assets, said John Breed, a company spokesman. “With the current figuration of the Noble fleet, it seems like a major writedown wouldn’t be something we would be looking at.”
Ensco wrote down the value of some of its rigs in the second quarter. Representatives for Rowan and Atwood had no immediate comment.
“Probably right now we do not expect to have to write down more assets in the near future, but obviously we’ve not done the next quarter review,” Marc Edwards, Chief Executive Officer at Diamond Offshore, told analysts.
James Tisch, CEO of Loews Corp, the largest shareholder of Diamond Offshore, told analysts on November 3 that he wouldn’t be surprised “to see some of our competitors get into financial trouble, where they are put into a position, or their lenders are put into a position, that they have to sell rigs”. Rather than trying to sell their older, out-of-work rigs, drillers should simply scrap them, Trey Stolz, an analyst at Iberia Capital Partners LLC in New Orleans, said. “Rigs need to get retired and taken out of circulation,” he said. “You’ll see that more and more as rigs come up on their five-year surveys and require massive investments to keep going.”
The number of offshore rigs ordered hit a high in August 2013 and there are now 86 floating vessels under construction for delivery through 2020, according to IHS Energy Inc. The total number of floating rigs now is 264.
WP-Bloomberg
