uploads///Oil Prices

Seadrill Partners’s View on the Offshore Drilling Market

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Aug. 30 2016, Updated 9:05 a.m. ET

Article overview

In this article, we’ll examine Seadrill Partners’s (SDLP) 2Q16 conference call insights regarding the current developments in the offshore drilling (OIH) space. The company also expanded on its views of the industry’s future.

Studying these can help us gauge the future of Seadrill Partners, as well as its parent company Seadrill Limited (SDRL) and its peers Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Rowan Companies (RDC), Transocean (RIG), and Noble (NE).

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Offshore drilling market situation

Following are some of the key points that Seadrill Partners’s management noted in its second quarter conference call:

  • In 2Q16, oil prices stabilized in $40–$50 range. According to Seadrill Partners (SDLP), there is a growing belief that these prices are at or near the bottom of the cycle.
  • Over the last two years, oil companies have implemented huge spending cuts. This is now reflecting in declining production. Seadrill Partners’s believes these spending cuts are not sustainable and that at some point, an increase in capital expenditure will be required to slow decline curves and increase production.
  • The tendering activity has shown some improvement. However, the contracts are for a very short time and also at a rate as low as break-even rates. The company believes that although this is not a very positive development, it is certainly a step in the right direction and an improvement from what we saw in 2015.
  • “Blend and extend” contracts are still the central point of customers’ conversations. Rates are reduced in exchange for extended contract terms with cancellation and retendering as alternatives for the customers.
  • In the current situation, there are many rigs chasing each job, evidence that supply far outweighs demand. It has been observed that operators have developed a clear preference for units that are currently operating or have not been idle for a significant period of time.
  • Scrapping activity is increasing at a rapid pace, which could help to rebalance the supply–demand situation. From the start of 2016, 16 floaters have scrapped. Since the beginning of 2014, 61 floaters have been scrapped. Considering fleet additions, the global fleet has contracted by 8% since 2014. The company expects this scrapping not only to continue but also to accelerate.
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