The mobile offshore drilling unit (MODU) market continues to weaken in 2015, reports Odfjell Drilling during its 1Q 2015 investor presentation.
The North Sea rig supplier expects the weak MODU market to continue during the next couple of years. Soft market conditions are due to the continued delivery of newbuilds and upstream oil companies’ increasing focus on costs and capital discipline, which is resulting in an increasing number of stacked units and continued downward pressure on day rates, it reports.
Odfjell’s drilling units are exposed to recontracting risk in the current or near-term drilling market, despite efforts at fierce competition for the limited number of contracts via reduced day rates. Also, the bifurcation between modern and older drilling units is expected to continue and scrapping of older units will continue.
Odfjell Drilling owns a modern fleet of three UDW and HE semisubmersibles, two UDW drillships (40% owned through the Deep Sea Metro joint venture) and a midwater semisubmersible. Several of these units are exposed to re-contracting risk in the current or near term drilling market.
Specifically, Odfjell’s Deepsea Metro II is currently free of charter. However, its Deepsea Aberdeen recently commenced a seven-year contract in April for BP in the North Sea, its Deepsea Atlantic and Deepsea Stavanger are up for renewals later in 2015, and its Deepsea Metro I secured new employment in Vietnam.
Odfjell’s platform drilling services is secured by medium- to long-term contracts, but the slowdown in North Sea activity level has led to the postponement and cancellation of some of its development and upgrade projects. As a result Odfjell has reduced its workforce in its engineering services segment and reports that further cost cuts and efficiency improvement programs are in the process of being implemented. Also, Odfjell’s well services activities are currently falling in the Norwegian Continental Shelf (NCS) region, but it is showing continued growth outside the NCS.
In response to the overall challenging market conditions, Odfjell’s cost cutting and efficiency improvement programs have already been implemented and further programs are in the process of implementation, the company reports. Specifically, the company has implemented a series of measures to reduce cost levels throughout the organization, including the optimization of its support functions. In Norway, about 60 onshore employees have been made redundant. Further downsizing of onshore personnel will be executed throughout 2015 as the company works to reorganize operational and technical support services.
Yet Odfjell sees improvement on the horizon, and predicts that the demand for modern ultra-deepwater (UDW) and harsh environment (HE) units will slowly start improving throughout 2016, leading to increased utilization and a subsequent improvement in day rates.
“In the longer term, we are of the opinion that the oil industry’s demand for drilling services will continue to be supported by the need for reserves replacement and by continued spending on exploration and field development in the main offshore regions,” reports Odfjell.
During 1Q 2015, Odfjell reported an operating revenue of US$240 million (down $34 million from 1Q 2014), an EBITDA of $71 million (down $3 million) and a net profit of $18 million (down $5 million).
“The Group’s financial results for the first quarter are satisfactory seen on the background of the current market situation. We are implementing adequate measures to remain competitive and robust under these market conditions which we expect will continue for a period going forward” says Simen Lieungh, Odfjell’s chief executive.
In a move to protect its balance sheet, Odfjell suspended dividends for the financial year 2014, suspended its share buy-back program, and its Brazilian joint venture, Odfjell Galvão, has put an ultra-deepwater drillship newbuild program on hold.
The Group’s investment in Odfjell Galvão, amounting to $9 million in 1Q 2015, has been affected by the risk and uncertainty related to the UDW newbuild program in Brazil. As a result, Odfjell Galvão suspended further equity contributions into the Sete newbuild projects until the future for the program has been determined.
The Odfjell Galvão drillship projects include three drillships to be built by Jurong in Singapore and Estaleiro Jurong Aracruz in Brazil, which were scheduled for delivery starting in 2016. It is expected that the drillship projects will be delayed by at least one year, compared with original delivery plans, due to the ongoing processes with major stakeholders in Brazil. Odfjell Drilling’s indirect ownership percentage is 10% in each of the vessels through its ownership in Odfjell Galvão BV.
Odfjell plans to announce its 2Q 1015 results on 26 August 2015.
Image: Deepsea Aberdeen / Odfjell
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