Low Prices to Take Toll On Drillers, Worst Yet to Come, Says Moody’s
Difficulties for the oil and gas industry are set to remain at least for other two years, Moody’s said on Monday, adding that drillers could be the first to suffer the low oil price environment and the decrease in day rates - amount oil companies pay drillers per day to operate an oil rig.
‘A persistent oversupply of rigs combined with low oil prices will prolong the downturn in the offshore contract drilling industry, weakening the credit quality of offshore drillers through 2017,’ Moody's Investors Service said in a note.
In its "The Worst Is Yet To Come For Offshore Drillers” report, Moody’s said it expects oil prices to remain low through 2017 because of a combination of strong US dollar and slowing growth in China.
According to the rating agency, if the oil prices remain near today's $40-$50/barrel range, dayrates will fall further, approaching the cash break-even cost levels in some markets.
The rig industry's overcapacity problem could last for several years. Older rigs will not retire easily and new rigs will keep coming with any positive development in the market” Sajjad Alam, Moody's Assistant Vice President and Analyst, commented.
Despite the recent hype over deepwater activities, deepwater/ultra-deepwater rig markets could encounter challenges on both the supply and demand fronts.
‘Low oil prices will restrain drilling activities in those higher-cost markets, while the supply of new rigs will continue at a high level through 2017. Shallow water markets, on the other hand, will not experience as much demand erosion, but will face similar supply pressures.’
According to Moody’s, these market conditions will have a significant impact on companies unable to reduce debt.
"Companies that can reduce debt, minimize capital spending and maintain conservative financial policies are more likely to avoid ratings downgrades during this down-cycle," Alam concluded.
It comes as no surprise that companies are taking important decisions in this direction.
New World Oil and Gas relinquished its Danica Jutland Licences 1/09 and 2/09 and Danica Resources Licence 1/08 in Denmark following the expiry of the Licences.
“Despite a comprehensive analysis of the licences confirming valid prospectivity, in the current oil price environment and in light of the early stage of development we believe it is the right decision to relinquish the Danish licences” New World’s non-executive Chairman Chris Einchcomb commented in a note released on Tuesday.
In general, as explained in January, low oil prices are laying the ground for higher margins in the future, but only for more solid and large players.