More rig day rate, fleet use declines seen

Drilling contractors, onshore and offshore, face further declines in day rates and fleet utilization this year as operators slash activity in response to a crude-price slump that shows no sign of early recovery, warns Fitch Ratings.

“We expect a longer, slower rig-recovery profile, based on higher global supply—driven by US shale—tepid global demand, and a perceived lack of OPEC price support leading to our U-shaped price forecast assumption,” wrote Fitch analysts Dmitry Marinchenko, Dino Kritikos, and Mark Sadeghian in an Apr. 15 research note.

The analysts said cuts in capital expenditures by exploration and production companies “have been weighted toward onshore, where possible, given US shale’s higher capex flexibility.”

Onshore drilling markets tend to be more volatile than offshore markets because contracts normally are shorter, the analysts noted. And the “regionally stratified” onshore rig fleet is more exposed to regional supply-demand imbalances.

“The characteristics of US shale have contributed to the US rig counts’ outsized weighting of drilling cutbacks, with total and oil-directed rig counts down over 45% and nearly 50%, respectively, from recent peaks,” according to the analysts. “International markets are expected to show more resilience but will also be challenged.”

In the offshore market over the past year, the analysts wrote, global rig supply increased by 8% while the number of working rigs fell 2%, pulling the utilization rate to 74% from 81%.

Offshore drilling day rates for ultradeepwater rigs are down by an estimated 40% from precycle levels. The Fitch analysts said other rig classes have experienced similar declines.

Offshore contractors are responding by shrinking their fleets.

“Fitch views the announcement of over 30 rig scrappings—led by Transocean’s plan to scrap 18 rigs—as an encouraging signal that should support day and utilization rates as oil and gas prices improve,” wrote Marinchenko, Kritikos, and Sadeghian.

The day after their report, Transocean disclosed plans to scrap the ultradeepwater GSF Explorer drillship.

In a report about Transocean, Cowen & Co. analysts J.B. Lowe and Roland Morris noted that only 13 of the rigs recently removed from the global fleet had worked in the past year. By their count, retirement of the GSF Explorer will bring the number of offshore rigs scrapped during the past 6 months to 33.

“We expect that [approximately] 100 floaters will eventually need to be retired in order to bring the market back into balance,” they said.