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Executives in the energy sector have had a wild ride over the past few years as oil prices have plummeted, then bounced. Difficult at times, surely, yet spare a thought for those running the listed companies that operate at deepwater drilling rigs. The share prices of major offshore rig companies wallow below or near decade lows.
Some operators are freighted with onerous debt obligations they cannot easily meet, not to mention equipment that oil companies do not need. Seadrill and Ocean Rig, both of Norway, have lost 90% of their value this year alone.
No wonder. Daily rental rates for even the most sophisticated deepwater rigs have tumbled 70%, back to prices not seen since 2004.
Miserly capital spending by the major oil companies, down more than half to $40 billion in the two years to 2016, have not helped. Adding to this lack of investment from its customers is a bubble of new builds, which is only slowly deflating now.
Understandably, the market is showing little faith in the underlying value of these rig. operators. US and Norwegian operators traded just 20% of their stated book values. The market value of US listed Atwood Oceanics suggests its rigs are worth no more than its constituent steel, according to Fearnley Securities. That might explain why another US rig company, Ensco, announced it would buy Atwood back in May. This week, Transocean followed by striking a deal to acquire Norway's Songa Offshore for $3.4 billion. This nascent movement towards industry consolidation follows signs that the utilisation of offshore rigs finally stopped falling last year, and has even risen slightly for certain rig types. Now, admittedly, the current low level of rig take-up at 65% to 70% has not been seen in 30 years.
Note, though, that the scrapping of rigs is at historically high levels, while the possibility of delaying new rig deliveries is plausible. Now, at the same time, oil company spending has picked up slightly with the oil price recovery. So at least some tightening of supply is evident.
While this may not start a lasting rally in this quiet corner of the energy market, for the first time in years, there is a glimmer of hope on the water.
