While much of the focus in the recent oil rout has been squarely on the shale drillers, the pain is being felt across the board in the energy sector. Among the most affected are the various unconventional high-price plays in the world’s deepwater.
And the latest moves by deepwater drilling superstar Transocean Ltd (NYSE:RIG) highlight just how bad the sector is getting for operators.
The cost of drilling in these regions just isn’t profitable for exploration and production firms. They’ve cut capital expenditure spending, manpower and reduced drilling in deepwater oil fields.
That’s a major problem for RIG and the other operators of these state-of-the-art drilling equipment. And the trend seems to not be reversing anytime soon.
For investors, the time to scrap RIG and its rivals could be at hand.
RIG Scraps Some Rigs
A few years ago, the deepwater drillers could do no wrong. As prices for oil surged, various E&P firms plowed heavily into various unconventional energy plays. A hefty dose of them were in new offshore oil and natural gas fields thousands of feet below the earth’s surface.
Unfortunately for the energy producers, no ordinary drilling rig will do. Drilling that deep requires some hefty technological know-how. Owners of sophisticated jack-ups and semi-submersible drilling rigs were able to charge mega-bucks to rent their equipment — sometimes $600,000 per day or more.
That was a boon to Transocean’s earnings and profits. And since oil was well over $100 per barrel, the E&P firms gladly paid that price.
And then the bottom dropped out. At sub-$50 prices for oil, deepwater drilling just doesn’t make sense and that’s caused chaos for RIG and its rivals. So much so, that RIG can’t even find buyers for its older and less sophisticated drilling equipment.
Transocean announced that it is planning on scrapping — as in throwing away — four drilling rigs. The rub is that those rigs had originally been slated for sale. Conditions in the offshore drilling sector have gotten so bad that no one wanted to buy them.
And the recently announced scrapped rigs aren’t necessarily junk either. One of the rigs — the Deepwater Expedition — cost a whopping $650,000 per day to rent just last year.
The cost to RIG’s bottom line for scrapping this equipment will be as much as $325 million.
But this isn’t the first time Transocean has reacted to the downward trends in deepwater drilling. Roughly a month ago, RIG moved to scrap seven other pieces of drilling equipment. With what it has already announced to be destroyed, RIG now has 16 offshore rigs slated for recycling. This is on top of the four rigs that Transocean has cold-stacked — meaning placed into storage — because they don’t have a chance to be rented this year.
All in all, analysts estimate that Transocean could see 50 to 60% of its ultra-deepwater fleet idled this year. And RIG isn’t the only deepwater driller facing similar issues.
Industry stalwarts like SeaDrill Ltd (NYSE:SDRL) and Noble Corp Plc (NYSE:NE) have all had similar issues lately — cold-stacking, canceled contracts, dwindling day-rates and even a few dividend suspensions. Lesser players, such as Hercules Offshore, Inc. (NASDAQ:HERO), have suffered even more.
Send RIG & Drillers to the Scrap Pile For Now
As one of the major leaders in the ultra-deepwater space, RIG is kind of the bellwether for the sector. Generally, when it starts to look shaky, the rest of the sector follows suit. The latest scrapping and measures at the firm could be the beginning of the next leg down for the deepwater drillers.
More write-downs, profit losses and dividend suspensions could headed the sector’s way.
And while it may be tempting to scoop up some shares of these guys on the cheap — oil will eventually go back up — it could be quite a while before we see it hit the $100-per-barrel mark that makes many of the deepwater projects viable from a profit standpoint.
The recent and continued capital expenditure cuts at the E&P firms highlights that they are digging in for lower oil prices for the medium term. That’s not good for the owners of these deepwater rigs
Ultimately, Transocean’s moves highlight just how bad conditions in the sector have gotten — and they will probably get worse before they get better. There’s no need to try and catch a falling knife just yet.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
