Five key trends in the offshore market: what can rig owners do to remain operational in the face of challenging conditions?

May 2016 | William Wu, Ryan Peacock

There’s no doubt the global drop in oil prices has hit the offshore drilling industry hard – and during the toughest conditions for decades, rig owners are having to use their ingenuity to remain operational.

So what trends are we seeing as a result of current conditions – and how is the market dealing with the challenge?

1. Oil and gas operators have cut capex

Total exploration and development capex investment was down 26% from 2013 to 2015, with exploration the first area to be cut. Latest forecasts suggest a further cut of 20-30% between 2015 and 2016 – a reduction that will directly impact the demand for drilling services.

New field developments have been deferred or cancelled by all of the major players as a result of cash constraints and uneconomical forecasted returns. As a result of project postponements, operators are reducing rig obligations by deferring and cancelling contracts – despite serious legal, reputational and financial ramifications.

2. The number and duration of new rig contracts has dropped

New contract volume declined by a massive 50% between 2013 and 2015, leading to a rise in uncontracted rigs and greater competition for the few remaining contracts. The share of idle rigs has grown by 15-19% since Q1 2013, leading to a significant increase in cold-stacking and retirement.

Contract duration too, has fallen for both floating and jackup fixtures, by an average of 32% and 33% respectively. The decline reflects uncertainty in future prospects as more expensive and complex projects have been mothballed.

3. The value of existing contracts has started to fall as fixture day rates are depressed across all rig types

As the gap has widened between supply and demand, day rates have been lowered, reducing the value of active contracts by 23% from a high in Q4 2014.

The share prices of listed rig owners have dropped – in some cases by as much as 60-80%, as the financial market assesses the impact of lower day rates on future cash flow.

4. Maximising liquidity has become critical

While revenue backlogs have dried up and debt has matured, operating costs have remained, leaving the industry with a cash deficit of almost $6 billion by the end of 2015.

Despite steps to cut planned capital expenditure, this net cash position looks set to remain negative as operating costs remain high and contracted revenue projections continue to decline. (Further financial analysis of the current market can be found in Energy Insights’ Offshore Drilling Corporate Performance Analysis Report).

5. Rig owners are taking proactive measures to cut costs

The industry isn’t sitting idly by as revenues are decimated – mindful of their limited control over future revenue, rig owners are cutting costs, renegotiating contracts and using short-term bankruptcy to restructure their debts.

More innovative operational cost cutting measures include minimising manning levels, moving rigs out of oversupplied regions, cluster-stacking fleets and embracing partnership as a route to improving project management.

Meanwhile overheads are being cut via reductions in wages, dividends and corporate expenses, the retirement of non-performing functions, and consolidation of corporate premises.

Laying the foundations for the upturn

If there’s any positive to be taken from the current market conditions, it’s that rig owners have been forced to embrace a more agile, collaborative, streamlined way of working.

It should position them well to benefit from these tough decisions as and when the upturn does arrive.


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About the authors

William Wu is an analyst with Energy Insights in McKinsey's London office and Ryan Peacock is a solution manager with Energy Insights in McKinsey's Houston Office