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The new downturn that the Covid-19 pandemic has brought upon the oil and gas industry has put many sectors in financial distress. Restructuring in the already-stretched offshore drilling market will accelerate, a Rystad Energy analysis shows, and the global floater fleet, whose utilization has been suffering since the previous downturn, can expect a new round of scrapping as a result.
An evaluation of active rigs in the global floater fleet reveals that up to 59 of the 213 units are potential candidates for retirement. This equates to one quarter of the floater segment, or 22 drillships and 37 semisubs.
Global demand for floaters had just started to recover before the pandemic and is now expected to remain under pressure until 2022. Demand is expected to fall from 129 rig years in 2019 to 110 rig years in 2020 and 103 rig years in 2021, before slowly inching back up to 117 rig years in 2022 and 122 rig years in 2023.
Meanwhile, 25 newbuild floaters are planned for delivery towards 2023. Naturally, weak demand is going to keep utilization at low levels unless we see a meaningful increase in the price of oil. Rystad Energy has created three scenarios, annualizing supply and demand in rig years, which show the range of the expected utilization levels based on rig attrition and newbuild deliveries.
Utilization began plummeting in 2016 and has hovered between 45% and 55% since, with 2020 levels expected to stand at 50%. Utilization could reach 77% in 2023 if all 59 floaters identified by Rystad Energy are retired and no newbuild delivered – a rather optimistic scenario. Utilization will decline with each newbuild floater delivery, down to 69% if all these units make it out of the shipyard.
In our last scenario, which assumes delivery of the newbuild units but not full retirement of the identified rigs, utilization could fall to as low as 52% depending on how many floaters are scrapped.
“Capacity attrition can set the stage for a comeback in utilization and play a key role as the offshore drilling industry seeks to shore up its finances. After drillers come out of restructuring we could see more mergers and acquisitions, which again could result in more attrition,“ says Jo Friedmann, senior energy service analyst at Rystad Energy.
A reduction in the number of drilling contractors through M&A will cut the number of bidders in any tender process. Rig supply needs to tighten for drilling contractors to regain pricing power, Friedmann adds.
Many of the 154 floaters scrapped since the last downturn share common characteristics. Early in the cycle, the only units to be retired were semisubs, while rig owners now see the need to start retiring drillships. Most of the semisubs that were retired at the outset were the oldest, least capable units. Increased operator preference for high-specification drillships in benign markets also led to more scrapping in the benign semisub segment of the floater market.
Those units that were cold stacked relatively early on during the prior downturn will be some of the first rigs to be retired in this downturn. Rig owners have been waiting for a recovery that never really took off, and the number of units that have been cold stacked since 2016 are in the double digits.
Reactivation costs can range between $20 million and $35 million for rigs that have been warm stacked for a relatively short period of time to between $40 million and $100 million for rigs that have been cold stacked for longer periods of time. Given current rates and contract durations, most of these cold-stacked units are unlikely to return to work.
Source: Rystad
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Valaris Limited announced new contracts awarded subsequent to issuing the Company’s most recent fleet status report on February 21, 2023. Three-year contract with Petrobras for drillship VALARIS DS-8. The rig will be reactivated for this contract. The total contract value is approximately $500 million, including a $30 million mobilization fee. 100-day contract with a TotalEnergies affiliate for drillship VALARIS DS-12. The contract is expected to commence in second quarter 2023. 70-day contract with Beach Energy offshore New Zealand for heavy duty modern jackup VALARIS 107. The contract is expected to commence in third quarter 2023. The total contract value is approximately $26 million. President and Chief Executive Officer Anton Dibowitz said, “We are particularly pleased to have secured the award for preservation stacked drillship VALARIS DS-8, for a contract that is expected to generate a meaningful return over the firm contract term, and we remain focused on exercising our operational leverage in a disciplined manner. This most recent award represents the sixth contract awarded to one of our high-quality stacked floaters since mid-2021, and speaks volumes about our demonstrated track record of project execution when reactivating rigs.” Dibowitz added, “Following the reactivation of VALARIS DS-17 and DS-8, we will have ten floaters working across the golden triangle, including four drillships in Brazil, a market where we expect to see continued growth over the next several years.” Updated Guidance As a result of the contract awarded to VALARIS DS-8, which will require the rig to be reactivated from preservation stack, we are updating our first quarter 2023 and full-year 2023 guidance provided on our fourth quarter 2022 conference call on February 21, 2023. First Quarter 2023 Contract drilling expense is expected to increase by approximately $5 million to $385 million to $395 million. Adjusted EBITDA is expected to decrease by approximately $5 million to negative $5 million to breakeven. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $25 million to $30 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Full-Year 2023 Revenues are anticipated to be $1.8 billion to $1.9 billion, unchanged from the guidance provided on our fourth quarter 2022 conference call. Contract drilling expense is expected to increase by approximately $60 million to $1.49 billion to $1.59 billion. Adjusted EBITDA is expected to decrease by approximately $60 million to $180 million to $220 million. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $280 million to $320 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Capital expenditures are expected to increase by $60 million to $320 million to $360 million. Source: Valaris Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Seadrill Limited announced that the West Neptune has executed approximately six months of term extensions with LLOG Exploration Offshore, L.L.C in the US Gulf of Mexico. The extensions will commence in direct continuation of the existing term, and will keep the rig busy until Q3 2024, furthering Seadrill and LLOG’s long-term association. Total contract value for the extension is approximately $79 million. Source: Seadrill Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Semisub rig owner Dolphin Drilling has inked a new contract with Peak Petroleum in Nigeria for its 1974-built Blackford Dolphin. The firm contract, which follows the letter of award in January, gives the Euronext Growth-listed owner of three rigs the potential to extend the unit’s backlog by a minimum of 120 days and up to 485 days. The deal adds to and will be a direct continuation of the previously announced 12-month contract with General Hydrocarbon Limited (GHL). Øystein Stray Spetalen-backed company said the effective dayrate associated with the minimum firm period of the contract is $325,000, including the mobilisation fee. “The final award of the contract for Blackford Dolphin shows the opportunities in Nigeria at a strong dayrate, in addition to building on the backlog for the rig. It also underlines the attractiveness of our assets, and we look forward to returning to revenue-generating operations in 2023,” noted Bjørnar Iversen, CEO of Dolphin Drilling. Source: Dolphin Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
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