This article was originally published by Seeking Alpha on November 6, 2014. Seadrill subsequently suspended its dividends three weeks after the publication of this article. Diamond Offshore has not announced any dividend cuts so far.
By Sarfaraz A. Khan
Summary: The offshore drilling industry has been struggling with over capacity. The deteriorating oil prices could extend the market’s woes.How are industry titans Seadrill and Diamond Offshore positioned to tackle this challenge?
The past few months have been awful for offshore drillers such as Diamond Offshore (NYSE:DO) and Seadrill (NYSE:SDRL).
The deepwater market has been plagued by overcapacity due to the arrival of newbuild rigs that were ordered during better times. This has pushed day rates lower. For some ultra deep water rigs, the day rates have dropped from peak levels of $650,000 in 2013 to between $375,000 and $500,000. And according to Rune Lundetrae, CFO of Seadrill, the biggest player in the sector in terms of market cap, things could get worse next year before they start stabilizing from 2016. Similarly, Esa Ikäheimonen, Transocean's CFO, has also warned that the business environment will remain difficult over the next twelve to eighteen months.
On the other hand, the market for jack-up rigs, used in water depths of under 600 feet, has shown relatively fewer signs of weakness. Moreover, industry executives are optimistic about the future of jack-ups, despite the addition of 139 rigs in the market by 2017, according to Seadrill's estimates. However, Deutsche Bank's analysts have warned that the jack-up market is also going on the same road as deepwater floaters.