A key player in the offshore drilling industry, Valaris was the last in the row of the number of these companies filing for bankruptcy in the U.S. The company proposed swapping some of its 6.5 billion USD debt to transfer ownership to its creditors. However, this is the most recent problem of offshore drillers. Unsettled offshore drillers debt still available are over 20 billion USD—and the number of fresh drilling contracts has considerably declined. The large accumulation of debt is not good news for the offshore oil industry. The situation is made worse by the projections that orders for offshore drilling orders won’t get back to normal until 2021.
Nonetheless, the market analysts of the IHS Markit in a report published recently has projected that the demand for drilling rigs would begin to get better in the coming year and that it would rally more in 2022. However, this will only occur in a few parts of the globe like South America and West Africa. According to the analyst, new orders for offshore rigs in the Gulf of Mexico will continue to remain low.
Increasing Numbers Of Key Offshore Companies File For Bankruptcy
In the meantime, some of the major players in the offshore drillers are filing for bankruptcy. The first to start the losing race is the Diamond Offshore Drilling which filed for Chapter 11 protection in April after its loss caused by 20 USD oil rate. With the company owing to debt of 2.6 billion USD, as reported by the Financial Times, Diamond Drilling made the move because of the unprecedented crash in the price of oil price. The company mentioned that the global price of oil has gotten worse in recent months.
Also, at the beginning of August, the Noble Corp filed for bankruptcy protection because of the company’s inability to pay the interest on it its borrowed loan. The interest payment was more than 15 million USD but the entire debt the company owed was 4 billion USD.
More Potential For A Debt Payment Default Looms
Unsettled debt in the offshore oil industry that could potentially default is more than 30 billion USD according to a Bloomberg report. And although a few major market participants like global leader Transocean are searching for ways to restructure their operations to avoid going bankrupt, there are a few more players in the industry that may end up like Noble Corp, Valaris, and Diamond Offshore. Some industry analysts believe that the effect would be beneficial for the oil industry.
The structure of the offshore drilling industry has been disrupted and there is no likelihood of immediate recovery, according to a note from Nicholas Green from Bernstein on Bloomberg. The fall in the price of oil that occurred in March may, paradoxically, cause some rebound over time if it results in the restructuring of the sector and eliminates the underperforming companies.
The Fall In Oil Price May Restructure The Industry
It is long overdue for such a rate of restructuring in the offshore oil drilling industry. The sector was one of the industries that were greatly affected by the COVID-19 crisis, together with the oilfield service providers, and it didn’t succeed to recover before the Saudi-Russian price battle and the COVID-19 crisis further brought the price down.
Currently, as E&Ps battle to stay in operation and minimize cost as much as possible, one of the intended plans they are considering is pricey offshore drilling. David Wethe, a Bloomberg reporter said it’s a little wonder then that offshore drillers are fast going down since 2017.
There are growing anticipations for more bad news in the industry. While some anticipate a soon reversal of fortunes for offshore drillers, the degree of the potential reversal is yet not known. The COVID pandemic made the industry a bit more cautious about extravagant fresh project spending. The present situation may make the cost-cutting more efficient as it is yet to be seen whether or not the price of oil will rally back to its position before the Covid-19 crisis. Therefore, a good number of exploration and production companies are beginning to tighten their budget and only spend on essentials.
On the whole, most offshore drillers may soon file for bankruptcy as Allison McNeely, a Bloomberg’s analysts reported. The industry ought to restructure, unite, and modify operations to settle with the new price environment. However, it’s unlikely that the price of oil will return to the 100 USD level it used to be any time soon.