Infographic from McKinsey Solutions. These projections are taken from Energy Insights’ Global Gas Outlook to 2030. For your free Executive Summary of the findings included in the report visit www.gasoutlook2030.com
There’s no sign of let up in the global drilling market, according to McKinsey Energy Insights. The gloom is, however, spurring improvement initiatives.
There’s no doubt the global drop in oil prices has hit the offshore drilling industry hard – and during the toughest conditions for decades, rig owners are having to use their ingenuity to remain operational.
Total exploration and development capex investment was down 26% from 2013 to 2015, with exploration the first area to be cut. Latest forecasts suggest a further cut of 20-30% between 2015 and 2016 – a reduction that will directly impact the demand for drilling services.
New field developments have been deferred or cancelled by all of the major players as a result of cash constraints and uneconomical forecasted returns. As a result of project postponements, operators are reducing rig obligations by deferring and cancelling contracts – despite serious legal, reputational and financial ramifications.
New contract volume declined by a massive 50% from 2013-2015, leading to a rise in uncontracted rigs and greater competition for the few remaining contracts. The share of idle rigs has grown by 15-19% since Q1 2013, leading to a significant increase in cold-stacking and retirement.
Contract duration, too, has fallen for both floating and jackup fixtures, by an average of 32% and 33%, respectively. The decline reflects uncertainty in future prospects as more expensive and complex projects have been mothballed.
As the gap has widened between supply and demand, day rates have been lowered, reducing the value of active contracts by 23% from a high in Q4 2014.
The share prices of listed rig owners have dropped – in some cases by as much as 60-80%, as the financial market assesses the impact of lower day rates on future cash flow.
While revenue backlogs have dried up and debt has matured, operating costs have remained, leaving the industry with a cash deficit of almost US$6 billion by the end of 2015.
Despite steps to cut planned capital expenditure, this net cash position looks set to remain negative as operating costs remain high and contracted revenue projections continue to decline. (Further financial analysis of the current market can be found in Energy Insights’ Offshore Drilling Corporate Performance Analysis Report).
The industry isn’t sitting idly by as revenues are decimated – mindful of their limited control over future revenue, rig owners are cutting costs, renegotiating contracts and using short-term bankruptcy to restructure their debts.
More innovative operational cost cutting measures include minimizing manning levels, moving rigs out of oversupplied regions, cluster-stacking fleets and embracing partnership as a route to improving project management.
Meanwhile overheads are being cut via reductions in wages, dividends and corporate expenses, the retirement of non-performing functions, and consolidation of corporate premises.
If there’s any positive to be taken from the current market conditions, it’s that rig owners have been forced to embrace a more agile, collaborative, streamlined way of working.
It should position them well to benefit from these tough decisions as and when the upturn does arrive.
Ryan Peacock, based in Houston, works at McKinsey Energy Insights as an oilfield service manager supporting clients in market due diligence, market forecasting and analysis. He was previously an engagement manager for McKinsey and Company. Peacock holds a PhD in chemical engineering from Stanford University.
William Wu, based in London, works for McKinsey Energy Insights as an analyst. Wu previously worked in structured finance for Leighton Holdings and investment management at Platinum Asset Management. He holds a master’s in finance and private equity from the London School of Economics.