Morningstar | Offshore Drillers Face Meager Utilization Long-Term
Consolidation has become a necessity in the supply-rich offshore rig environment, and Transocean has been an active participant in the deal market. Recent measures, including agreeing to acquire Songa Offshore and Ocean Rig, retiring numerous rigs, and selling off its jackups under construction, have resulted in the largest floater fleet and one of the highest-specification among our coverage. However, these attributes won't protect Transocean from enduring weakness in offshore drilling markets. With shale producers lowering industry break-evens, investment in offshore projects has weakened and consequently challenged fundamentals for offshore drillers. Offshore stakeholders have worked toward lowering break-evens and made considerable progress, but only a select portfolio of offshore projects are competitive with shale. Long payback periods and high cost of investment continue to plague the prospect of offshore investment. As a result, opportunities have dried up for offshore drillers, and we expect it will be a while before they return. We believe that the offshore drilling industry will remain weak for many years to come. We believe rig demand will be hampered by our "lower for longer" oil price forecast of $60/barrel Brent, which will limit the volume of new offshore projects. Additionally, we think the ability of future rig retirements to rationalize supply is limited. Altogether, this should equate to midcycle (2028) floater utilization of 71% and jackup utilization of 67%. Weak utilization will weigh on rig pricing; we forecast midcycle day rates about 25% below predownturn levels for floaters and about 30% for jackups.
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