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Are Cost-Cutting Plans Really Helping Offshore Drillers?

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Cost-cutting initiatives

To survive this industry downturn, offshore drilling (XLE) companies have no choice but to manage their costs and reduce them as much as possible. All offshore drilling companies, including Diamond Offshore (DO), Ensco (ESV), Noble Corp. (NE), Seadrill (SDRL), Atwood Oceanics (ATW), and Transocean (RIG), have resorted to cost-cutting plans to maintain their profit margins and to keep going in this depressed scenario.

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Contract drilling expenses

The drilling expenses of Diamond Offshore (DO) for 2Q15 were $342 million, compared with $350 million in 1Q15 and $395 million in 2Q14. The company’s drilling expenses declined primarily due to reduced operating costs on stacked rigs. This quarter’s expenses were below the company’s guidance, which was $350 million–$370 million, as stated in last quarter’s conference call.

In its 2Q15 conference call, Diamond Offshore noted that the strong US dollar, particularly in Brazil, helped to lower expenses and was the primary driver of its performance, exceeding its own guidance.

General and administrative expenses

The general and administrative (G&A) costs of Diamond Offshore (DO) declined from $17 million in 1Q15 to $16 million in 2Q15. The company had reduced the 2Q15 guidance on G&A expenses in last quarter, and the expenses were in line with the guidance issued.

Also, the second quarter’s G&A expenses were significantly lower by 20%, compared to 2Q14 expenses of $20 million. This decrease was mainly due to lower compensation costs, as the company reduced its back office workforce by 20% since last year.

Operating income and guidance

Operating income continued to be at the same level, increasing by $0.4 million in 2Q15 compared to 2Q14. Although the contract drilling expenses and G&A expenses were reduced, they were partially offset by the reduction in revenue and the increase in depreciation expense.

The company expects the third quarter drilling expenses to further decrease to $320 million–$340 million. The incremental cost savings due to rig stacking should be partially offset by the costs associated with the relocation of rigs for cold stacking. G&A expenses are expected to lie in the range of $16 million–$18 million.

In the next article, we will take a deeper look at the company’s scrapping and cold stacking activity undertaken to save costs.

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