Offshore drilling companies will be under pressure through 2017 on low oil prices, over-capacity: Moody's

The global slowdown in oil prices coupled with a persistent oversupply of rigs will prolong the downturn in the offshore drilling industry, weakening the credit quality of offshore drillers through 2017, research and ratings agency Moody’s has said. This bodes well for explorers, including India’s state-owned Oil and Natural Gas Corporation (ONGC), facing pressure on capital expenditure on new projects.

According to Moody's Investors Service, overcapacity has already eaten into day-rates -- the amount an oil company pays drillers per day to operate an oil rig -- for offshore drillers. If crude oil prices remain near the current $40-$50 per barrel range, day-rates will fall further, approaching the break-even cost levels.

With fewer available drilling opportunities in the marketplace, drillers are growing desperate to win contracts and minimise operating costs. "The rig industry's overcapacity problem could last for several years. Older rigs will not retire easily and new rigs will keep coming with any positive development in the market,” said Sajjad Alam, Moody's Assistant Vice President and Analyst.

Deepwater or ultra-deepwater rig markets will have challenges on both the supply and demand fronts. Low oil prices will restrain drilling activities in these higher-cost markets while the supply of new rigs will continue at a high level through 2017. However, shallow water markets will not experience as much demand erosion.

Moody's expects oil prices to remain low through 2017 owing to greater production efficiency, the strategic need for certain nations to maximize oil production, slowing growth in China, a strong US dollar and the possibility of new supply coming online from Iran, according to the report

"The worst is yet to come for offshore drillers,” Moody’s report said. Day-rates for offshore drilling companies will remain under pressure as upstream companies look to trim costs and continue to drill conservatively in a low oil price environment.

Most offshore drillers are likely to have weaker credit profiles by 2017 as earnings and rig values decline substantially without any material improvements to debt levels. Large drillers have greater financial and operational flexibility but even their credit profiles will erode if industry conditions remain weak for an extended period of time.