Offshore drilling space shows signs of recovery, though edges fray

By James McCandless

San Antonio, June 21 – The energy sector is a fixture of the distressed debt space and has been for some time, with offshore drilling and its satellite industries seeing much of the turmoil.

At the end of 2018, the industry looked to be on the brink. Oil prices had hit the mid-40’s context and drillers were filing for bankruptcy.

Before then, in October, Ensco plc and Rowan Cos. plc announced plans to merge to form a $12 billion entity.

The companies languished for months, adjusting the merger agreement to win over shareholders.

After finding the magic formula, the merger was completed with Rowan shareholders receiving 2.75 Ensco shares for each Rowan share owned.

“It looked a little shaky at times,” a trader said. “But that’s the way oil is right now. Prices got better over time and they pulled the trigger.”

Others, like Parker Drilling Co., weren’t so lucky. The company filed for Chapter 11 bankruptcy in December and reemerged in March.

Diamond Offshore Drilling, Inc. survived the year but keeps missing earnings and revenue expectations.

Sector outlook

The cyclical nature of the energy sector, combined with the sustained rise in oil prices, has stoked worries about a downturn.

But that downturn might not come this year. Most analysts estimate that the price of a barrel of West Texas Intermediate crude oil will straddle $65 by the end of the year.

“The next short-term oil move may be down, probably into the low-to-mid 50’s,” John LaForge of the Wells Fargo Investment Institute said in a recent note. “Later in the year, though, we suspect that WTI will make a run at $65 as geopolitical tensions heat up among oil-related countries.”

For the time being, that forecast has rung true. In the last few weeks, tensions between the United States and Iran have come to the surface with disputes over oil tankers and boundaries.

WTI responded with a price hike to the mid-50’s per barrel.

Other predictions peg WTI at $65 to $70 per barrel.

Oversupply worries continue to be the through line in the industry as U.S. firms ramped up production in the latter half of the year.

As a counter to those worries, OPEC slashed production and sanctions that restrict who can buy crude from Iran and Venezuela were imposed or strengthened.

“This is all kind of precarious in the sense that any optimism, cautious as it is, kind of goes to pot if a recession hits,” a market source said. “But that’s basically fifty-fifty.”

But offshore production appears to be on the rise. According to Baker Hughes’ Rotary Rig Count, there are 24 active domestic offshore rigs. This time last year, there were 20.

Satellite industry

Despite the cautious optimism surrounding offshore drilling, a satellite industry has been decimated.

The offshore transportation space has been buried in debt and cost-cutting measures from customers.

“A lot of the issue is that some of the helicopters are not being used,” a trader said. “What can you do if you have 20 helicopters in your inventory that aren’t producing income and nobody wants them? It’s just taking up space.”

Waypoint Leasing Holdings Ltd., PHI, Inc. and Bristow Group Inc. all declared bankruptcy in the last year.

Bristow had announced, and then cancelled, a merger with Columbia Helicopters, followed by a series of debt waivers that bought the company a few more weeks before its filing.

A plateau for now

If oil prices hold, drillers will likely continue the trend of cautiously expanding operations. The largest firms will look to consolidate as a form of insurance for the next inevitable downturn.

“This sector is always going to churn,” the trader said. “I think it’s going to feel a little stagnant. A lot of these names will come out the other side alright. But a lot of the smaller ones are less protected.”

In the last few months, with the passing of the latest earnings season, drillers seem to be on a plateau.

Crude oil futures continue to hover in the lower 50’s, seeing peaks and valleys occasionally.

In the most recent earnings season, Ensco Rowan reported a loss of $1.69 per share, beating estimates of a $1.79 per share loss.

Revenues were sluggish at $405.9 billion.

Whiting Petroleum Corp. and Diamond Offshore also posted losses to varying degrees of severity.

“If oil runs up, then we’ll see the requisite recovery from drillers,” a trader said.

© 2015 Prospect News.
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