Some positives and negatives..."CHICAGO, Jan. 26 /PRNewswire/ -- Low global crude oil prices are beginning to affect the one sector of the oil market that has remained fairly robust -- deepwater drilling. The recent cancellation of various deepwater drilling contracts, though specific to the individual parties involved, may indicate the pricing environment's expanding impact and raise new questions about credit quality, according to analysts at Duff & Phelps Credit Rating Co.(DCR).
"While DCR does not anticipate widespread deepwater rig cancellations, the downward pressure applied to this market from these announcements could directly or indirectly affect the credit quality of all deepwater drilling operators," said Steve Flaherty, a DCR vice president. "As such, the exposure, or lack thereof, of companies operating in this segment needs to be analyzed in the context of the companies' total operating base and their overall corporate strategy."
Since oil prices began to decline in early 1998, oil companies have begun to look for ways to curtail costs, conserve capital, enhance productivity and improve profitability. These efforts have resulted in a slowing of exploration and development activities, which in turn has directly affected the demand for oil drilling services.
Historically, the sectors first affected by pricing concerns were the land and shallow water drilling markets, as these areas tend to be more commodity- like and have higher associated costs on a per barrel basis. Due to the reduction in activity in these two areas, the operating rates for drilling rigs have declined significantly over the last year, with drilling day rates for a shallow water jackup rig falling from a high of $75,000 to current levels of approximately $20,000.
To date, the activity level associated with the deepwater drilling market has remained steady as these projects tend to be long-term, high-yield plays that have traditionally been less sensitive to short-term market price fluctuations. However, due to the extent and duration of this current price environment, oil companies are beginning to implement strategies that may delay the development of these deepwater prospects. This could result in downward pressure on the operating rates of rigs that are specifically designed to operate in these harsh and deepwater environments, which in turn could negatively impact the credit profiles of the drilling companies that have exposure in this area.
In addition to the anticipated reductions in exploration and development spending over the near term, the recent consolidation among large oil companies may also apply pressure to the operating rates for deepwaterdrilling vessels. Participants in this market tend to be the integrateds and/or large independent oil companies due to the substantial capital costs and long development times associated with developing these fields. Therefore, a consolidation among the leading potential deepwater participants may limit demand for these types of drilling rigs.
Despite these concerns, the characteristics and economics of the deepwater drilling market have helped to mitigate some of these downward pressures. The deepwater drilling sector has not experienced the speculative rig building that has been characteristic of other sectors, namely the shallow water jackup market. Most current construction projects, either new builds or conversions, in the deepwater market have been undertaken only upon the signing of a drilling contract, which should help maintain a balance between supply and demand for this market.
Additionally, the deepwater lease holdings of oil companies are typically under defined terms and conditions whereby the companies have a specific time in which to drill and develop their prospects. Therefore, while the oil companies may delay their exploration and development plans for the near term, they will ultimately have to drill or risk losing their ownership rights.
Overall, the severity and length of the current oil price environment will continue to impact all levels of the energy industry, including the deepwater drilling sector. "
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