What happened

Shares of companies focused on the offshore drilling industry are plunging today. Leading the downdraft was Diamond Offshore Drilling (NYSE:DO), which plummeted 38% by 2:30 p.m. EDT on Thursday. Weighing on the company was its decision not to make an interest payment on its debt. That news sent other offshore-drilling-related stocks lower, with both Transocean (NYSE:RIG) and Oceaneering International (NYSE:OII) falling more than 10% at one point in the day. 

So what

According to a filing with the Securities and Exchange Commission, Diamond Offshore Drilling has elected not to make the semiannual interest payment on its 5.7% senior notes due in 2039. While that payment was due Wednesday, it does have a 30-day grace period. If Diamond Offshore doesn't make an interest payment by May 15, then it will be in default.

That would then trigger a cross-default of the company's bank credit facility as well as its other outstanding notes. The company has retained legal and financial advisers, which are evaluating options. Among those they're likely considering is whether to restructure Diamond Offshore's debt in bankruptcy. 

An offshore drilling rig in a storm.

Image source: Getty Images.

One offshore-related company has already filed for bankruptcy due to the steep downturn in oil prices following the COVID-19 outbreak and the related decline in offshore spending by oil producers. Meanwhile, two other leading offshore drillers have hired advisers to look for ways to restructure their debt, which could include filing for bankruptcy. The concern is that as more companies file, it will force others to go that route. 

Transocean also has debt concerns weighing it down. Credit rating agency Moody's has it on the list of the energy sector companies most vulnerable to defaulting on debt over the next two years. Among those with junk-rated credit, it has the most debt maturing during that time frame at $4.3 billion. It will be difficult for Transocean to refinance that debt, given its credit rating and the current market environment. 

The challenging market conditions have also forced offshore companies to pull back the reins on spending. Oceaneering International recently reduced its capital spending plan to between $60 million and $80 million, while also cutting its unallocated expenses to an average of $20 million per quarter. That decreased spending will help improve its financial flexibility during this turbulent period. Oceaneering is in better financial shape than most of its peers, having ended last year with $1.2 billion in cash against less than $800 million in long-term debt. 

Now what

The offshore drilling industry never recovered from the last oil market downturn that started in 2014. As a result, the sector entered this turbulent period on shaky financial ground. Because of that, several offshore-focused companies will likely have no choice but to file for bankruptcy so that they can restructure debt and shore up their financial situations.