Offshore Drilling Bits February 20, 1999
BUSINESS IS TERRIBLE, EVERYONE KNOWS IT...
SO WHAT'S NEXT?
Could the news get any worse? Would it matter?
With oil company budget cuts now routine -- just like U.S. air attacks on
Iraq interests -- there doesn't seem to be much shock value left to send
stocks lower. Even U.S. attacks on Iraq have lost their ability to boost
oil prices. Traders once glued to CNN in hopes of a war to make a few
bucks now prefer play Dot Com, the new game for the insane.
So languish the oil service sector stocks, no longer fearing the budget ax
and no longer paying much attention to Sad-em.
What "news" would send prices higher or lower? Of course there are extreme
events, some of which can happen in a 30-second sound bite and cause extreme
price reaction, but what "reasonable" news could move the stocks? I don't
think there is any. About the most exciting thing to watch for these days
are the Tuesday reports on oil storage inventories.
The sector has been pummeled with hundreds of discouraging press releases
since November 1997, the beginning of the current bust. It will take more
than a day or a week of "good news" to bring the faithful back to the flock.
The oil service industry must see increased spending by oil companies before
the future is bright again. So far the spending levels haven't even
flattened out, much less headed higher. Until spending increases, oil
service companies are in full tilt survival mode.
In survival mode I suspect management may be less concerned about perception
on Wall Street and be more interested in saving the very existence of the
company as an ongoing entity. In other words, the most important group to
please today is not the shareholders, it's the debt holders. As long as debt
service stays current, these guys are usually happy. If not, they can
control, if not own the company, for all practical purposes. And debt
holders could give a hoot about shareholders.
If I am an oil service company, I have to figure out how to make my cash
stretch as far as possible. I need to be ruthless in cutting G&A and other
costs. I should be looking at how to best maximize the financial value of
my assets to buy me enough time. I have to seek out new (and much more
expensive) sources of capital since these days the shower of money on the
sector has turned into a determined drought. I should have a heart-to- heart
with my customers (oil companies) and try to determine how I can help them
by cooperation and long-term planning -- after all, we are eternally
dependent on each other. I must survive, even though it may not be pretty.
Today, survival may not be foremost on the minds of some companies. Most
will be profitable for 1999, and some even have profitable (yet greatly
diminished) earnings visibility past 1999. But you should dig your well
before you get thirsty.
A look at the situation of offshore drillers reveals two camps. One camp is
highly leveraged and needs even more capital to complete work in progress.
The prime example of this camp is R&B Falcon.
The other camp is populated with companies having low/no debt and a few
bucks in cash. Diamond Offshore leads this pack.
Put Diamond on one end and R&B Falcon on the other and everyone else falls
in between with varying loads of debt, cash and capital needs.
If one had to choose today which situation looks the best, it would have to
be the companies closer to the Diamond side of the line, in my view.
These will be the companies that can survive the longest due to low debt
service requirements, cash on hand, low cost basis on their assets, and
minimal construction projects underway that could hiccup at any moment.
(Hiccups in this business can cost dozens of millions of dollars in added
expense and lost revenue.)
Also consider the roots of Diamond. During the previous bust Jim Tisch
decided (after a visit from yours truly) to make a value play in the
offshore drilling business. The investment in Diamond was at a time when
asset values were pathetic. It was the right thing to do -- invest in
assets of a highly cyclical industry at fractions of replacement costs at a
time when no one else cared. Smart, smart, smart!
Diamond has since become a world leader in the industry. In hindsight, they
have managed the business almost perfect. Tisch should have bailed out in
1997 -- he could have bought back in now or later this year at even lower
prices. But since he is still in, I suspect Diamond is, and will continue
to be, on the prowl for value purchases. A repeat performance.
R&B Falcon will survive in a slightly different mode. I don't think they
will be the predator -- buying rigs on the cheap during the down cycle (they
must be cussing the day they ever heard the word "Cliffs Drilling"). With
nine construction projects ongoing in six locations, the seemingly urgent
requirement for $300 to $500 million to replace interim construction
financing, the high debt load, and being faced with an increasing tendency
for oil companies to skeedaddle out of high day rate contracts -- the force
be with them!
A tale of two companies with very different strategies. Both strategies may
prove to be right depending on the time frame from which they are viewed,
but I can bet which CEO sleeps better these days.
So what's next? Survival of the fittest. A testing of the strategies. All
eyes glued to the oil price ticker like a heart monitor, desperately seeking
signs of life...beep, beep, beep.
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OFFSHORE RIGS AREN'T THE ONLY ONE GETTING BEAT UP
The U.S. Gulf supply vessel market continues to suffer as boat owners and
operators position themselves for survival.
Benchmark 180-foot supply vessels are earning around $2,500 per day, a level
close to cash break-even. The February day rate is a $300 decline from
January and well below the $8,000 per day the vessels were earning one year
ago. Some boat owners expect rates to fall below $2,000 before the market
shows signs of improvement. Over the next several months, additional supply
vessels will be placed in “safe harbor” as owners take steps to stabilize
the market.
As day rates continue to plummet, supply vessel companies are being forced
to cut costs. Some companies already have cut wages of vessel crews and
administrative staff. A few companies have laid off workers.
Overall, supply boat owners and operators remain in a state of shock. Just
a year ago the market was robust with day rates in the $8,000 range and just
about every available vessel was on charter.
Vessel owners have mixed views on vessel retirements as a partial solution
to today's crisis in the supply boat sector. With a high percentage of the
fleet approaching 20 years old or older, some workboat owners think
retirements are a good idea. However, most claim the market is not bad
enough for companies to be forced into selling off aging equipment at
bargain basement prices. One owner who held back on ordering new equipment
when most owners were jumping on the newbuilding bandwagon several years ago
questioned why anyone would retire an older piece of equipment in good
repair so that a new piece of equipment owned by a competitor could work.
Rumors have been circulating around the market that some of the newer
vessels built over the last few years at prices around $8 million to $10
million are for sale. But so far there's no sale reports of new-generation
equipment.
Tidewater has 32 older supply vessels for sale in the worldwide market.
The recent spate of oil company mergers and acquisitions is impacting the
supply boat sector. In many cases, client loyalty built over the years has
diminished.
Additional vessels likely will be placed in safe harbor over the next
several months. As vessels come up for expensive surveys, drydockings or
repairs, owners can't justify the expense when day rates are at break even.
The only logical solution is to cold stack the units, according to workboat
owners.
From Offshore Data Services
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LEASE SELL WILL TAKE PULSE OF OIL COMPANY INTEREST
The MMS issued the final notice of sale for Central Gulf of Mexico Lease
Sale 172. The sale will be held March 17. The final notice covers 3,807
available blocks in water depths ranging from 13 feet to over 11,200 feet. |
