COLUMN | “Complete catastrophe”: Diamond Offshore, Noble Corp, Borr and Pacific Drilling [Offshore Accounts]
The last few days have been crazy, with West Texas crude contracts showing negative prices earlier in the week, meaning oil companies were paying customers to take away their crude at the Cushing Hub in Oklahoma.
International Brent prices languish under $30, whilst the global economy is expected to contract as badly as in the Great Depression of the 1930s. Not surprisingly, in such a hostile environment, the drilling market has plunged, causing collateral damage to offshore support vessel owners as well.
Brokers in Aberdeen were reporting fixtures of platform supply vessels under GBP3,000 (US$3,690) for the first time in two decades this week, as a surfeit of vessels chases a shortage of work.
Owners have responded by cold stacking vessels and taking off crew. Westshore Shipbrokers reported ten PSVs going into lay up in the North Sea since March 30, including vessels from Hermitage Offshore, Olympic, DOF and Standard Drilling (see here).
Here come the letters of termination
As expected, the moment oil prices tumbled, oil companies took the opportunity to cancel contracts.
In Roman times, bad news was presaged by blood raining from the skies. Today, it comes in the form of contract cancellations raining down. After the drillship Valaris DS-8 dropped its BOP stack onto the seabed off Angola (which we reported here), Total was quick to terminate the contract, although Valaris did at least have contract termination insurance in place.
Valaris also reported the termination of a jack up with Chevron in Angola, whilst Maersk Drilling reported terminations from both Shell in Trinidad and Aker BP in the North Sea, and that Tullow in Ghana would cancel Maersk Venturer’s contract in June 2020.
Noble’s fleet status is ignoble
Noble Corp. recently published its fleet status report (here) which gives a good picture of the dire developments facing the drilling sector.
We see a clear pattern of lower utilisation, interrupted operations, and early termination. There was some good news for Noble in Vietnam, where the semi-sub Noble Clyde Boudreaux won a new contract for a single well from early June 2020 to late July 2020. Neither the operator nor the day rate were disclosed, whilst the jack-up Noble Mick O’Brien also received an extension to its contract with Qatar Gas up until late August 2020.
The chaos caused by the Covid-19 outbreak, the oil price crash, and the quarantine and travel restrictions meant, however, that the drillship Noble Tom Madden was put on standby in Guyana in April 2020, for a period of up to 90 days by its charterer ExxonMobil, and the day rate was slashed by 50 per cent.
Exxon Mobil in Australia also put the jack-up Noble Tom Prosser on standby from mid-April 2020, for a period of up to 365 days, during which the day rate will be reduced to only US $47,000 to US$50,000. ExxonMobil has committed to chartering Noble Bob Douglas in Guyana against a six-month contract that is expected to start in late….March 2021.
Stacking and slashing
At least those rigs are receiving some revenue. Noble chose to stack the drillship Noble Bully II and analysts are now speculating whether this unit and its sister will be scrapped. After two years of optimistic warm stack with crew aboard, in the hope of reactivation, the semi-sub Noble Paul Romano was also cold stacked.
The North Sea has proved a bloodbath. Jack-up Noble Sam Hartley finished its contract and was warm stacked, as was the jack-up Noble Sam Turner, and the jack-up Noble Hans Deul. Cromarty Firth is now filling with idle rigs again. The jack-up Noble Joe Beall finished its contract in Saudi Arabia and was “retired”, which we assume is a euphemism for being sold for scrap.
Saudi Aramco wants a gentle word on the pricing
Aside from stacking and termination, the other trend evident from Noble’s report was clients requesting day rate reductions.
Having plunged the oil industry into crisis with its decision to raise production in March, Saudi Aramco now wants it contractors to share its pain. Noble reported that it received requests for day rate reductions from Saudi Aramco on four units on contract there.
In such circumstances, like a small shopkeeper in Sicily visited by a friendly gentleman in a smart suit offering protection, Noble’s negotiating power is limited. If Aramco is going to beat reductions out of its drilling contractors, the offshore vessel and construction contractors can expect the same.
Summary: “Complete catastrophe”
In his analysis of the situation (here) analyst Vladimir Zernov gives a succinct summary of the crisis:
“This is a complete catastrophe. There are no other words to describe the situation. Noble Corp. should draw what’s left on the credit facility and start negotiations with creditors because the company needs a comprehensive restructuring. Noble Corp. cannot carry the weight of its huge debt in current conditions, and the company will suffer massive cash burn going forward if it does not eliminate the debt load and the corresponding interest payments. Chances for common equity survival in this scenario are almost non-existent.”
Can’t argue with that.
Borr Drilling’s bad news
It was the same story when Borr Drilling provided its update this month (here). There was a smidgen of positive news from Asia-Pacific, where two of Borr’s jack-ups got letters of award for contracts of 365 days and 200 days duration, supposedly starting work in the third quarter of 2020. Note that these are not signed contracts, however, and whilst the good news was provisional, the bad news in Borr’s contract update was definitive.
Two jack-ups working for ExxonMobil in Nigeria received notices of termination, although Exxon has to give 180 days before they come off contract. A third jack-up, working with BW Energy Dussafu in Gabon, received notice to stop operations, as all travel to and from Gabon has been suspended.
In the North Sea the semi-sub rig MSS1 received notice of early termination one month earlier than previously estimated but Borr reported that the rig was entitled to an early termination fee. Finally, Perenco in the UK cancelled a contract with Borr for a jack-up from April 2020 to October before it had even started work.
Diamond Offshore Drilling then added to the gloom enveloping the entire sector by announcing that it would not make the semiannual interest payment for its 5.7 per cent notes due in 2039, and that it had retained restructuring advisors.
The chairman resigned, and a Chapter 11 bankruptcy filing is expected. Then on April 20, Australian customer Beach Energy announced it had terminated the contract for Diamond semi-sub Ocean Onyx, citing a delayed arrival in Australia as a breach of contract. Talking about kicking someone when they are down!
So, basically the entire offshore drilling industry is insolvent, burdened by unsustainably high debts, unsustainable cash burn, and limited growth prospects.
Good news for Pacific Drilling’s management
But never mind the bad news, over at Pacific Drilling the executive team were showing their commitment to the company by making sure that they filled their boots. The latest SEC Filing 14A by the company shows the usual executive excess (here):
There was a lot of blah blah blah about stretch targets, and meeting budgets, and high standards of governance, but the only thing you need to know is that the senior management and executives at Pacific Drilling are still doing very, very nicely, despite the fact that the company remains loss making and that 2020 will be a lot worse than 2019.
As the report states, “the annual total compensation of the employee identified at median of our company (other than our CEO) was US$145,330; and the annual total compensation of Mr. Wolford, (the CEO) as reflected in the 2019 Summary Compensation Table was US$1,352,480. Not bad for a company that reported massive losses (see here) and a cash burn of $67 million dollars for 2019. Many people in the offshore industry might wish they were that lucky median employee in Pacific Drilling, let alone CEO Bernie Wolford.