While Maersk Drilling’s 1Q 2019 result was impacted by lower day rates and expiry of legacy contracts, the driller expects improved market fundamentals with increased utilization and higher day rates in the longer term.
The shipping giant has been working to move away from the oil and gas-related business and demerged the drilling contractor but kept its vessel-owning business Maersk Supply Service as its strategy shift proved fruitful.
Maersk Drilling’s new legal name following the demerger is The Drilling Company of 1972 (TDC 1972).
In its 1Q 2019 statement Maersk Drilling said that, during 1Q 2019, the Brent crude oil price averaged $64/bbl, down from the average of $69/bbl in Q4 2018. The current oil price level remains supportive of free cash-flow generation among the E&P companies. Meanwhile, years of under-investment and low discovery volumes have reduced the average reserve life, and E&P companies are consequently incentivized to increase exploration and development efforts in order to ensure future production capacity, the driller said.
Further, more than 90% of the undeveloped offshore resources are estimated to be profitable at current oil price levels. The combination of increasing free cash flows, the need to replace reserves and existence of economically viable offshore projects is likely to result in offshore E&P spending increasing and more projects being sanctioned, according to Maersk Drilling.
The company added that the anticipated recovery in the offshore market is supported by an increase in utilization across both the jack-up and floater segments, though the utilization levels are not yet supportive of a broad-based day rate recovery. Certain markets are still characterized by excess capacity with incremental demand and/or further supply rationalizations required to achieve increasing day rates. Other segments such as the ultra-harsh jack-up market are characterized by significantly higher utilization which is supportive of day rate improvements.
Maersk Drilling stated that fixture activity continues to increase for both the jack-up and floater segments. Tendering activity continues to increase for jack-ups, while floater tendering activity seems to be more muted. Particularly, the average duration of jack-up contracts being tendered is increasing, whilst the average floater tender duration remains flat. While the timing of the recovery remains uncertain, Maersk Drilling continues to expect higher utilization and day rates in the longer term, the driller concluded.
Revenues hit by lower day rates
In the first quarter of the year Maersk Drilling’s revenues totaled $308 million, down 8% from $336 million in 4Q 2018.
The lower revenue is due to lower average day rates especially in the floater segment impacted by expiry of legacy contracts. The driller’s average day rate in 1Q 2019 dropped to $208k from $225k in 4Q 2018.
The increase in overall utilization from 67% for 4Q 2018 to 73% for 1Q 2019 was primarily driven by a reduction of available days following the decision to divest one jack-up rig in late 2018 and increased number of yard stay days.
Revenue within the jack-up segment of $204m in 1Q 2019 was at level with $205m in 4Q 2018.
Revenue within the floater segment decreased to $104m in 1Q 2019 compared to $131m in 4Q 2018, negatively affected by Maersk Voyager coming off a legacy contract driving a decrease in the average floater day rate to $247k in 1Q 2019 from $284k in 4Q 2018, and a decrease in contracted days to 418 days in 1Q 2019 from 459 days in 4Q 2018 partly driven by Maersk Explorer conducting a yard stay in 1Q 2019.
As of March 31, 2019, the revenue backlog amounted to $2.2bn.
As reported earlier on Thursday, Maersk Drilling signed one new contract and six contract extensions in 1Q 2019 with a total contract value of $72m.
In addition to the contract backlog at the end of March, Maersk Drilling has signed two new contracts and one contract extension since the end of the first quarter 2019.
Maersk Drilling maintained its 2019 guidance. The company’s profit before depreciation and amortization, impairment losses/reversals and special items is expected to be around $400m and capital expenditures are expected to be in the level of $300-350m.
Maersk Drilling CEO, Jorn Madsen, said: “Our 2019 full-year guidance remains unchanged. Longer term we continue to expect improved market fundamentals with increased utilization and higher day rates.”
Offshore Energy Today Staff
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