In its 3Q16 conference call, Ensco (ESV) gave its outlook on the offshore drilling market. It pointed out some key factors that are catalysts for the industry’s recovery.
Ensco’s view of the industry will help us analyze ESV’s outlook as well as that for other offshore drillers (OIH) such as Seadrill (SDRL), Transocean (RIG), Rowan Companies (RDC), Noble (NE), Diamond Offshore (DO), and Ocean Rig (ORIG).
Ensco believes the market will remain challenging in the near term but that three factors will help to rebalance the rig supply and demand. We’ll touch on these factors below.
Oil prices and break-even prices
Commodity prices have recovered from the decades-long low experienced during 1Q16. Commodity prices as a lever in rebalancing are linked to break-even prices. Industry-wide efforts to reduce offshore break-even economics have resulted in many offshore projects that are economically feasible at current commodity price levels.
After interacting with its customers, Ensco suggests that many of these programs will reach final investment decision approval when capital expenditures are freed up for incremental projects. Additional ongoing efforts to further lower break-even prices will help improve the economics on other offshore projects, which in turn will lead to further customer demand in offshore drilling.
In the next article, we’ll see one more lever—rig supply.