Another Delay Hits Offshore Drilling

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The last time offshore drilling was upended in the Gulf of Mexico, it was the horrible Deepwater Horizon disaster that cost 11 rig workers their lives and spewed thousands of barrels of oil into the ocean. Drilling was shut down and safety measures were added to make sure nothing like that happened again.

Today, drilling has been halted once again for a much less catastrophic reason:  faulty bolts. Last week, regulators alerted the industry that bolts on General Electric (NYSE: GE  ) devices that connect to drilling tubes and safety gear are susceptible to stress corrosion. Drilling fluid leaked from one well, which has caused the delays right now.  

There are estimates that a single well will be delayed by up to three weeks to replace these bolts, a huge delay when it costs $1 million a day to operate drilling rigs.

Impact on rig owners
The question is: Who pays for all of the downtime? Ultra-deepwater rigs are leased for upwards of $600,000 per day and the two- or three-week downtime to replace bolts will be a big cost for whomever is responsible.

Fifty-five of Transocean's (NYSE: RIG  ) rigs have the GE connectors, which will cost money and downtime, or lost revenue. The challenge for an industry increasingly focused on ultra-deepwater drilling is the complexity of making changes there. Replacing even a single bolt is a challenge when it's a mile underwater and this will cause many delays across the industry.

We know that Diamond Offshore (NYSE: DO  ) is replacing bolts on about 30 connectors around the world. I would also expect Noble (NYSE: NE  ) and Seadrill (NYSE: SDRL  ) to be affected by these delays, especially considering their exposure to the ultra-deepwater market. The good news is that the delay came before a rush of new rigs are delivered this year, and there wasn't a bigger impact after those rigs went into service. But we still don't know who's responsible for the cost. 

If rig owners are responsible for some of the cost, it will reduce utilization rates and impact both top- and bottom-line results. With high cost ultra-deepwater rigs accounting for a vast majority of profit and also taking the longest to fix, there could be a big impact on financial results.

The questions for GE may be more complicated. There will be millions of dollars of cost associated with this fix across the industry, and I wouldn't be surprised to see companies go after GE for some of those losses.

Expanding internationally
U.S. regulators are leading the charge that will slow down drilling in the gulf but other countries will likely follow. International regulators have been made aware and are working with companies drilling in their jurusdiction.

It looks right now like the industry will essentially police itself, replacing bolts where they're installed, whether regulators require it or not. That's the initial reaction from drillers so far.

Minimal impact this time around
The drilling industry was essentially put on hold for months when the Deepwater Horizon disaster took place, but this looks to be a much smaller deal. It's even possible that increased scrutiny after the disaster helped limit this to a patch job instead of something bigger.

From an investment perspective, we may see an impact on first-quarter results because of the delay, but it won't be nearly as big as it was a few years ago and it's still unclear who will take the hit. It will depend on how contracts are written and there may be some back and forth about who foots the bill. At least this time around, they'll be fighting over days of downtime instead of months.

A driller worth watching

If you're an energy investor looking for exciting opportunities, then you should look into one of the more exciting plays in the space: Seadrill. To learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.

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9/26/2016 4:02 PM
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