Danish offshore driller Maersk Drilling posted a net loss for the fourth quarter of 2016 “in the middle of the worst downturn in the history of the industry.”
According to an annual report for 2016 from the driller’s parent company Maersk Group, despite significant cost optimization initiatives, Maersk Drilling was severely impacted by continued large scale cost reductions and project cancellations in the oil industry and the large inflow of new capacity over the last years. Based on the challenging market conditions, significant impairments were recognized in Maersk Drilling.
Maersk said that offshore contract drilling is in the middle of the worst downturn in the history of the industry, and the industry is expected to continue to deteriorate over the near-term with further declines in rig activity levels and offshore capital spending in 2017. The industry does not expect to see significant improvements in offshore rig demand until the market reaches a stable oil price range of $60-70 per barrel or until offshore rig cost levels adjust to a lower oil price.
Market shifts have resulted in offshore exploration and production spending declining from a high of $290bn in 2014 to a projected $190bn in 2016, representing a decline of 34% (Rystad Energy). Offshore spending is expected to decline a further 10-20% in 2017, with further risk of decline if oil prices trade at lower levels or if onshore oil production proves more resilient than expected.
The decline in offshore spending and rig activity levels has led to total industry utilization falling from a peak of 89% in 4Q 2013 to current levels of 56% in 4Q 2016. The extent of the decline in the industry is now more severe than the downturn in the mid-1980s.
At present, global rig supply holds significant excess capacity, as approximately 130 floaters and 230 jack-up rigs have been stacked, while the newbuild order book still comprises approximately 40 floaters and 100 jack-up rigs scheduled for delivery, the vast majority of which do not have contracts. This confluence of factors is driving the need for a significant scrapping cycle to resolve the imbalance between supply and demand in the market.
Maersk Drilling posted a loss of $1.4bn for the fourth quarter of 2016, due to recognition of the impairment loss of $1.5bn before tax and $1.4bn after tax, compared to a profit of $181 million in the same period of 2015.
During the quarter, the underlying profit decreased to $16m from $176m in 4Q 2015 negatively impacted by more rigs being idle. The average operational uptime was 99% for the jack-up rigs and 98% for the floating rigs, compared to 97% for jack-ups and 90% for floating rigs in the same period of 2015.
The driller’s revenues dropped to $344 million in the fourth quarter 2016 from $617 million in the corresponding quarter of 2015.
At the end of the year Maersk Drilling had nine rigs idled and off contract. As the market outlook for the offshore drilling industry remains highly uncertain, Maersk Drilling said it continues to evaluate stacking on a case-by-case basis. So far, this strategy has resulted in all idle rigs currently being warm-stacked.
Offshore Energy Today Staff