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Drilling Cutbacks Mean Service Companies Forced To Scrap Rigs
Submitted by Nick Cunningham via OilPrice.com,
Despite the decline in oil prices, the U.S. is expected to boost production by 300,000 barrels per day in 2015, up to a yearly average of about 9.3 million barrels per day, according to the most recent government estimates.
But the number of oil and gas rigs in operation is already beginning to drop. For the week ending in December 19, the rig count dropped to 1,875 active rigs, down from 1,893 a week earlier. The fall off is an indication that exploration companies are beginning to pare back investments. Pulling back on drilling may result in a lower future production, which could hurt the growth prospects of some oil firms.
However, the slowdown in drilling activity is having a much more immediate and acute effect on a separate set of companies – those supplying the rigs.
Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed. That means that when drilling slumps, their profits take an immediate hit. Even worse, exploration companies may see rising profits from existing production as oil prices rebound, but drilling service companies don’t benefit if their drilling contracts had been put on hold or cancelled.
The problem is compounded by the fact that a slew of new offshore oil rigs are set to come into operation – an estimated 200 over the next six years. As Bloomberg reports, these new rigs will mean there could be a surplus of about 140 rigs, meaning offshore oil contractors will have to scrap that many to bring new ones online.
If oil prices stay where they are now – in the neighborhood of $60 per barrel – a deep contraction in shipping rig supply will be inevitable. In 2015, spending on offshore exploration may be slashed by 15 percent, which will mean taking a deep knife to companies providing rigs and contracting. Transocean has already announced that it is idling seven deepwater rigs, along with several other drillships.
However the shakeout may take some time because offshore contractors can resort to using older rigs in order to bring down the rates they are charging, essential to maintaining market share. In order to entice exploration companies to keep up the drilling frenzy, older ships can keep costs lower.
But that may not be a tenable prospect since offshore contractors will feel compelled to put the new and more state-of-the-art rigs into operation. That will force companies with older fleets to start discarding the most dated drilling rigs.
Transocean already took a $2.6 billion impairment charge in the third quarter of this year, due to a “decline in the market valuation of the company’s contract drilling services business.” By scrapping more ships, it expects to write down at least $240 million in the fourth quarter. More may be in the offing – Transocean released an update on the status of its fleet in mid-December, confirming its plans to scrap 11 ships. The statement also added that “additional rigs may be identified as candidates for scrapping.”
Perhaps it is Seadrill, another offshore drilling services company, that has taking the worst of the oil price downturn. The company decided to cancel its dividend in November amid falling oil prices, a move that sent its share price tumbling downwards. Seadrill has seen its shares lose almost 75 percent of their value since July.
As with the rest of the industry, the fortunes of offshore drilling services companies depends on the price of oil. However, unlike the oil majors, which have more diversified interests both upstream and downstream, offshore contractors take it on the chin first when oil prices go down.
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Looks like anything they were getting ready to set up they dropped real quick. Looks like the Slowdown in Drilling is On!
And there's this
Russia may cut its oil output due to low global oil prices and the lack of investment into the country’s energy industry, Deputy Prime Minister Arkady Dvorkovich said Thursday.
http://news.xinhuanet.com/english/europe/europe/2014-12/26/c_133879234.htm
Watch for a shakeout in the drillers... Not just M&A for the weak players, but bankruptcy and shutdown due to over-capacity... The drilling industry was bracing for a downturn BEFORE the drop in crude prices... There is a vast over-supply of offshore rigs that are stacked, along with dozens of new rigs being built at an average price of $750,000,000 a pop... The stock price for some of the big players is at or below scrap price for the iron...
All this cheap energy......Obama must be livid.
Oh well.......screw'em
Drill baby drill.
Sara Palin can see $1.95 gas from her window in Wasilla AK....it's right across the corner at the BP station.
Larry Tisch did very well the last time this occured
Guys....
Comprehend what's stated....
Rigs Scrapped.
That doesn't mean set aside, mothballed, placed on injured reserve, get a note from mom that it was home sick.
We're talkin' scrapping as in dismantle, sell for junk, crapola, bye bye.
This is all part of the Plan within the Great Game.
Maybe Unintended Consequences, Maybe Not.
After all, General Secretary Chu of the Deportment of Governmental Wand Waving and Energy by Diktat, said that the best thing would be.... to just get rid of hydrocarbon energy.
And here's a way to make it real costly.
Get the drillers to scrap the drilling capacity.\Then when prices rebound a la Saudi's raising the price which they so cut (as in not magical supply demand, duh) then there'll be No Competition with New Supplies for a long long time.
Read Sheik Abdul Giotchabythenads' lips.
Glad that Mrs. Fuck the EU and the rest of DC think this is a good thing.
As was named the movie from Upton Sinclair's Oil! "There Will Be Blood"
Both on the downside; bankruptcies, tons of jobs lost, plummeting Capital Investment, deflation
But Major Inflation years form now when...
Ta Dah!
The price of oil is re-raised and the demand for loanable funds skyrockets..
Why, might just even snake us out of that Liquidity Trap, by golly by gosh
Deflationary pressures across all sectors now
Vast trickery and Inflation Later
T Boone calls it "lay down".
Lay down or bend over.
Just different tastes.
Dec 26, 2014
The Dallas Federal Reserve projects that Texas will lose 125,000 jobs related to the falling price of oil by mid-2015.
http://www.bizjournals.com/sanantonio/news/2014/12/26/drop-in-crude-oil-...
Yeah....and they scrapped rigs in the gulf a few years ago.
Hello....is anybody out there?
I figure that's roughly 480 miles of cars on freeways
+1
The russians will be glad to buy the rigs @ scrap price.
You mean the Chinese.
Much of the iron in these fleets is well past their use-by date... Old, out of date and costing a fortune to keep operating... Best to scrap them and take the hit on asset value, but we know where that goes...
Depreciation should mitigate those losses into gains.
Surely they used a five year life for those rigs...
NO, the rigs will just be priced much lower on a daily basis and will go back into service. There was a lot of fat in the oil service business, they will take a much lower price to stay in business with oil being lower now. The cost of drilling a well will be cut in half is my guess.
They just need to get some title loans on those rigs.
I hear there are more payday loan offices (20K) than McDonalds (14K) in the US. Maybe they can get multiple payday loans.
The Chinese will buy it all just like Larry Tsich did in the 80's and haul it all to the south china sea
You can almost see Larry Kudblow's drill boner shrinking
And the banks that loaned funds to Transocean and Haliburton are losing big too. Banks are going to take the brunt of the drop in oil prices. They were pricing for oil to continue to get more expensive.
Ha ha. Your kidding right?
No. Do you care to disagree or are you going to just flap your lips? The banks are going to lose loans and thus lose revenue.
I would think the energy portion of the HY market will take the brunt; right where all the mom and pop retiree accounts have been herded.
Print
Or
Pension
The banks get bailouts. Remember?
Not likely for Transocean and Halliburton to go tits up and most of their debt is corporate bond issuance.
Never let a good crisis go to waste.
How so? Extrapolate.
Soul Glow I will try to extrapolate for you. In Brisbane Austrailia during the G20 the FSB http://www.financialstabilityboard.org/about/ passed some shit that says that banks can never go bankrupt, any losses will be absorbed via deposits.
Have a look at what the FSB passed - "Adequacy of Loss-Absorbing Capacity of Globally Systemically Important Banks in Resolution"....in short the Banks won't lose, the depositors will.
Banks are too big to fail....have you been sleeping for the last 6-7 years?
Ccanuck
http://www.financialstabilityboard.org/2014/11/adequacy-of-loss-absorbin...
Two key points of the progressive agenda, to eliminate hydrocarbon fuels and maintain world chaos. Things are going swimmingly.
Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed.
'It's terrible, the way these terrorists threaten our very existence. They hate us because of our freedoms. WMD's are REAL.'
Sincerely,
Dick Cheney
Former C.E.O., Halliburton, and R.N.C. 'guidance person'; current contributor to media outlets such as FAUX News ('WE decide, YOU comply')
Price goes down, fewer suppliers. WOW, this is AMAZING. All along I was thinking that a lower oil price would mean every company could pump MOAR! What a shocking article this is!
It's definitely a "Golden Era" for Bankers and the financial industry.
the demand goes down and the price goes down.
how to generate the demand?
for example by a war.
let us wait until orthodox christmas (the fifth of january 2015) and we shall get the war in Ua, NATO versus New Russia, trying to involve russian army.
the stage is set:
https://www.federalregister.gov/articles/2014/12/29/2014-30365/prohibiti...
I'd like to try one of those extra rigs out to see if I can find gold. I'll need some government grant money to start operations. The Playboy mansion next to UCLA seems to be a good location to do some practice drilling. They have a good legal staff there too.
Here is the reason that market's aren't efficient and discount knowledge instantaneously: stoopidd gubernment statistics that are false, by intent or incopmetence. "Despite the decline in oil prices, the U.S. is expected to boost production by 300,000 barrels per day in 2015, up to a yearly average of about 9.3 million barrels per day, according to the most recent government estimates."
Right.
Two things supporting that. Lot's of wells already in process and funded will be completed and brought on line which will increase production. Rig and drilling service prices will drop by 50% and so wells will be cheaper to drill and remain profitable at lower oil prices. that's business 101
As chaos works through the system there will be momentary gluts of oil followed by long periods of scarcity. In each step down, more consumers are shaken out of the economy. Such is the nature of a deflationary spiral. We are in the beginning of the end of the car culture that has dominated America over the last 100 years. Will there be cars at the end of the century. Of course there will, but they will have titanium skins and be RPG proof.
What I want to know is when will the central planners start thinning us useless eaters?
T Boone Pickens talked about this problem the other day. A ticking time bomb...
But the OIL should make a short rebound soon before it dives for the final time into the $15-20 dollar zone.
http://www.globaldeflationnews.com/whats-really-happening-with-oilthe-la...
http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...
Wake me when the rig count hits 2012\2013 levels.
Seadrill shares down 75%. This must be a Cramer buy buy buy stock
When it hits $2
I doubt if anyone is going to scrap a modern serviceable rig when it could be mothballed. Oil prices can go up just as quickly as they came down. The oil cars in Uncle Warren's Burlington Northern Santa Fe railroad would seem destined to be mothballed also.
Hey, what happened to all the ads on ZH to invest in oil. You know the ones: Big hat no cattle.
Golly.
This is just the nicest Christmas present that America's jumbo integrated oil companies could have gotten.
I hope they remember to send thank you notes to Santa.