The offshore oil and gas drilling market is, according to many analysts, heading into a two year slowdown.
With this forecast the outlook for many drillers has been downgraded by Wall Street analysts as they prepare for the worst. Even Rowan Companies (NYSE: RDC ) , previously one of Wall Street's favorite drillers, has not escaped the negative coverage.
Falling out of favor
At the end of February, Maersk Drilling, a unit of Danish shipping conglomerate A.P. Moller-Maersk and one of the offshore drilling industry's heavyweights, became the latest offshore driller to issue a dismal forecast for the sector.
Maersk Drilling CEO Claus Hemmingsen told news agency Reuters that the current slowdown in the offshore industry will last 12 to 18 months, and the market for rigs will rebound in 2015.
In a telephone interview Claus stated, "I would rather call it a short-term softness than anything dramatic...We see postponements, not cancellations."
In particular, Transocean, which owns the world's biggest drilling fleet, believes that it will take 18 to 24 months for the industry to recover. Meanwhile, Seadrill, the world's biggest offshore driller by market capitalization has warned that the slowdown could also last for two years.
Still, one thing that remains certain is the fact that a slowdown is coming.
Slammed by downgrades
With a industry slowdown almost a certainty, Wall Street analysts have turned negative on offshore drillers.
Since the beginning of the year Transocean's 2014 EPS estimates have been downgraded 15.3% to $4.81 from $5.68. In addition, Seadrill has seen earnings estimates downgraded 7% for 2014, from $3.58 per share to $3.33.
Unfortunately, Rowan has been hit the hardest, with earnings estimates for this year being revised down by a shocking 24%.
However, looking through Rowan's fleet status reports issued during the last few months or so, it would appear that, as of yet, the company is not feeling, or reporting any kind of slowdown at all.
Indeed, Rowan has issued three fleet status reports so far this year, and the notable events relating to rigs coming on/off contract have been as follows:
- EXL IV: Awarded a one-year extension with Carigali Hess in Malaysia commencing in late December 2014 at $159,500 per day, above the previous day rate of $151,000.
- Joe Douglas: Awarded a one-well contract estimated at 75 days with LLOG in the Gulf of Mexico at $160,000 per day, in line with the previous day rate, commencing late February 2014.
- J.P. Bussell: Awarded an estimated 209 day contract with Petrofac in Malaysia at $143,000 per day, above the prior day rate at $140,000, which commenced at the beginning of March 2014 .
These are all of Rowan's rig movements that have taken place during the past three months, and to me it seems that things are still ticking along nicely for the company.
Analysts have other ideas
It would appear that so far rates in the jackup market have held up well, although analysts believe that in the near term jackup rates are likely to come under significant pressure. According to Morgan Stanley's Ole Slorer and Jacob Ng:
Jackup dayrates have held up vs. what has unfolded in the floater market. We nevertheless highlight a surge in jackup orders, driven largely by speculative drillers at Chinese shipyards The jackup orderbook now stands at a record 140 units, of which only ~20 have been contracted...
It remains to be seen if this forecast will come true, but so far Rowan doesn't seem to be feeling any effects of a slowdown.
Nevertheless, Rowan has four new UDW high-spec jack-up drillships currently under construction in South Korea, and when these units are put to use, the company will report a huge jump in earnings.
These units are set for delivery between now and 2015, and three out of four units are already contracted out for multi-year periods, with day rates in excess of $600,000.
Now, a day rate of $600,000 is a game-changer for Rowan. Currently, as reported at the end of the fiscal third quarter, the company's average day rate was $169,200, less than one-third of the rate that the new units will provide.
With four new drillships in the company's fleet, each demanding day rates upwards of $600,000, Rowan's top and bottom lines are likely to rapidly expand as the new units come online. What's more, with contracts already signed for these units, Rowan is likely to miss much of the downturn in the industry
Overall, when Rowan's four new units come online, they will add $2.4 million per day to Rowan's revenue, approximately $876 million per year assuming 100% utilization. Rowan's revenue was just under $1.4 billion during 2012, so we can see how much of an effect this will have on earnings.
Overall then, it would seem as if the whole offshore drilling industry is gearing up for a slowdown and decline in dayrates over the next few years.
However, as of yet Rowan's day rates have not come under pressure, and the company is well placed for growth during the next year or two.
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