Gloom at Offshore Drilling Companies

Crude oil below $50 per barrel sends jitters to offshore drilling business

With business climate continuing to remain grim due to sliding global crude oil prices, offshore drilling companies like Aban Offshore, Dolphin, and Jindal Drilling among others may not get any wage hikes for the current financial year.

"Appraisals usually take place in April but there is no sign of it so far. We haven't been told formally of no appraisals this year but looking at the business scenario, don't think there will be any salary hikes," a senior marketing official with Jindal Drilling told Business Standard.

Crude oil prices need to be at least $50 a barrel to make offshore shallow water drilling viable. With prices below $50 per barrel at present, overall offshore business (shallow and deep) has hit rock bottom, said industry officials.

"We are getting our salaries as of now but it is not always on the first of every month. The situation is scary," said an official with Dolphin Offshore Shipping.

According to Rigzone data, offshore rig utilisations in South America-Brazil region is the lowest in the last two years having dropped below 30 per cent in September from over 70 per cent in September 2014.

"A lot of internal meetings are taking place in the company and senior officials when asked about appraisals say that there will be none this year. But no formal announcement is being made, we are already in mid-FY2017," said another official with Jindal Drilling.

In June quarter, Aban Offshore, the flagship company of Aban Group, reported a 24 percent sequential fall in its net sales and 51 percent on year-on-year basis led by lower utilization of rigs and rig renewal at lower rates. Currently, out of 18 rigs only eight rigs are operating.

Aban Offshore's future growth depends mainly on rise in crude oil price and higher exploration activity, said Kotak Securities in its report.

The blood bath taking place in the offshore drilling business at present has not just remained restricted to lower earnings growth but is expected to lead to more serious consequences to the extent of companies filing for bankruptcy.

"Of course, a lot of people are making losses, because of the utilization problems. A few significant players are already in financial distress. Couple have already filed for bankruptcy. There is a lot of stress in the offshore segment," said G. Shivakumar, executive director and chief financial officer of Great Eastern Shipping said in the earnings conference call of June quarter.

The latest casualty of low crude oil prices is Singapore-based offshore construction and support services company Swiber Holdings Ltd. The company in July has filed an application to wind up operations and has placed the firm in provisional liquidation. Swiber owns an operating fleet of 13 construction vessels, with 2,700 employees spread across Southeast Asia and other countries.

Though the business scenario in offshore segment is grim and is expected to remain in this mode for the next couple of years as crude oil prices are not seen going up significantly, domestic offshore drilling companies are not expected to witness a bankruptcy situation by virtue of their presence largely in shallow offshore drilling.

"Decline in crude oil prices will hit deep offshore drilling more because the cost of production is higher for them when compared with companies into shallow drilling. Indian companies are largely in shallow offshore drilling and due to this they will face weak earnings situation but bankruptcy is ruled out," said an analyst with local brokerage on condition of anonymity.

Aban Offshore and Great Eastern Shipping are among top offshore drilling companies in the country among others. While GE Shipping has its offshore drilling vessels deployed on longterm, Aban Offshore does not enjoy an equally comfortable position.

Currently, ten rigs of Aban are lying idle out of a portfolio of 18 rigs. Significant leverage on Aban's balance sheet and ageing of fleet are other key factors which makes brokerage cautious on its fundamentals, said Kotak Securities in its recent report. "The stock continues to be an event-driven performer and we expect the stock price (in the near term) to move based on crude oil price movement," it said.

Aban Offshore provides drilling services globally both shallow and deep waters to offshore exploration and production (E&P) companies.

Reference - http://www.business-standard.com/article/companies/gloom-at-offshore-drilling-companies-116090800671_1.html