Seadrill Braces for Two More Years of Rig Pain on Oil Slump

Seadrill Semi-Rig West Pegasus
Photo of Seadrill’s West Pegasus, via Captain Freeman

By Mikael Holter

(Bloomberg) — Seadrill Ltd., the offshore oil driller controlled by billionaire John Fredriksen, said the rig market is unlikely to recover for at least two years following a slump in crude prices.

“You may see a stabilization in 2017,” Chief Financial Officer Rune Magnus Lundetrae said in an interview in Oslo. “That means you get day rates that at least cover costs including funding.”

Daily rates for chartering offshore rigs in the spot market, meanwhile, may fall further after sinking below $400,000 for the most advanced vessels from $650,000 less than two years ago, Lundetrae said at a conference. Rates may climb back toward $400,000 during 2017, roughly the level rig owners need to cover expenses including debt, he said.

An almost 50 percent plunge in crude prices since July has led oil companies from ConocoPhillips to Norway’s Statoil ASA and OAO Rosneft of Russia to cut investments, reducing demand for services such as offshore drilling. Rig owners were already struggling with a glut of new vessels ordered during the past decade’s oil-industry spending boom.

Ensco Plc, Transocean Ltd. and Seadrill, the three biggest offshore drillers, have cut dividends, costs and rig deliveries as they adapt to lower demand and contract cancellations.

“There’s a buildup of overcapacity,” Ivar Brandvold, chief executive officer of Fred Olsen Energy ASA, an Oslo-based driller, said Wednesday. “That is going to be the prevailing situation in 2015 and also into 2016.”

Seadrill Advantage

Seadrill fell 1.7 percent to 82.65 kroner at 9:47 a.m. in Oslo, the lowest level in more than a month. Fred Olsen rose 1.6 percent to 65.5 kroner. Seadrill has plunged 61 percent and Fred Olsen 67 percent over the past 12 months.

Seadrill expects to make acquisitions once competitors’ valuations have fallen further. As the company saves cash after suspending dividends in November, a continued deterioration of the market may give Seadrill an advantage, Lundetrae said.

“Some companies will be even more distressed than today” when the market starts improving, he said Wednesday. “Then they won’t have the muscles to lift themselves, and we can come in and swipe the table.”

Seadrill, based in Hamilton, Bermuda, and its 70 percent- owned subsidiary North Atlantic Drilling are in discussions with Moscow-based Rosneft on a rig agreement that’s been delayed by international sanctions against Russia.

Seadrill said last week it would be “very challenging” to close the deal by May.

The accord, which includes $4.1 billion in offshore-rig contracts and North Atlantic’s acquisition of about 150 onshore rigs from Rosneft, will only go through if these two components are included, Lundetrae said. “It’s everything or nothing.”

Copyright 2015 Bloomberg.