Seadrill/offshore oil: under water

Seadrill chief executive Anton Dibowitz did an excellent job of summing up the situation for offshore oil services on Tuesday: too many rigs carrying too much debt. His ominous view was accompanied by a glut of bad news. Company results revealed a $1.3bn operating loss, a delisting from the NYSE and the appointment of a restructuring team to lower debts. Oslo-listed shares slipped 10 per cent. Once worth $20bn, Seadrill now has a market value of less than $50m.

Mr Dibowitz has been here before. He led the company, founded by billionaire shipping magnate John Fredriksen, through a Chapter 11 restructuring in 2017. It may come as some consolation that this time many of his peers are in the same boat. The coronavirus pandemic has accelerated an oversupply of rigs. Oil prices have fallen below $40 a barrel. Houston-based Diamond Offshore Drilling filed for Chapter 11 in April.

With total debts close to $7bn, Seadrill’s fate is in the hands of creditors who have few options beyond an equity swap. Capacity reductions are a necessity. Seadrill’s first-quarter loss mostly stems from impairment charges of $1.2bn connected to its plan to scrap up to 10 of its rigs. Investment in new offshore fields remains subdued. Tentative signs of an uptick have been put on hold by the virus.

Oil majors battling the structural forces of global decarbonisation are now cutting spending and shelving new projects at a faster clip. The result: offshore activity is at a 20-year low this year.

Oil services have never been cheaper relative to the market and oil majors. But years of low investment do not mean the cycle is due to turn. Investment values may have fallen but offshore production is not about to collapse. Offshore capacity under construction was 3.8m barrels per day last year, say analysts at Bernstein. That is only just below the 4.3m annual average since 2000. The forecast for this oil sub-sector is just as dark as its product.

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The Lex team is interested in hearing more from readers. Please tell us what you think about the prospect for oil services in the comments section below.



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