CHICAGO & NEW YORK–(BUSINESS WIRE)–The rally in offshore driller equity prices may prompt some companies to take a closer look at equity raises to improve liquidity, according to Fitch Ratings.
Fitch believes that additional liquidity will help to alleviate near-term credit risks at individual firms, but it may also delay the tough industrywide fleet rationalization decisions that offshore drillers are likely to have to make in order to achieve market balance.
Share prices for five larger, established offshore drillers are up about 25%-65% since mid-February, providing a possible window of opportunity for equity issuances. This coincides with the upward momentum in oil prices above $45/barrel from around $30/barrel over the same period. While a considerable share price improvement, offshore driller equities remain 40%-80% below levels seen in June 2014 at earlier peak oil prices. Despite the dilutive effects, it may be attractive to improve liquidity at these higher share prices given the dim offshore rig utilization and day-rate prospects over the medium term.
Ensco plc recently issued 65.6 million shares, a nearly 28% increase in shares outstanding, at $9.25 per share, resulting in net proceeds of $586 million. The company’s decision to raise cash following its opportunistic $861 million debt tender for $622 million, representing an average discount of about 28%, signals its willingness and ability to raise capital to preserve its liquidity position. Fitch generally views the combination of these actions as credit supportive but recognizes that the equity market would likely view further liquidity-focused equity raises unfavorably.
The equity raise by Ensco could provide the necessary shareholder cover for other offshore drillers to take dilutive action to improve liquidity. Fitch believes that Noble Corporation plc and, to a lesser extent, Rowan Companies have a higher near-term probability of equity issuance than peers. This is due to a combination of their relatively stronger recent share performance, maturity schedule, existing cash position and backlog, jackup fleet orientation and, in the case of Noble, contracted newbuild delivery payment. While Diamond Offshore and Transocean Ltd. remain exposed to similar credit risks as other offshore drillers, Fitch does not anticipate either driller will issue equity near term.
Fitch believes that any additional liquidity will help to alleviate near-term credit risks at individual firms, but it may also delay the tough industrywide fleet rationalization decisions that offshore drillers are likely to have to make in order to achieve market balance due to lower demand and a significant oversupply of rigs, including newbuilds. Fitch continues to anticipate that the floating rig rationalization process will generally be more orderly than the jackup market and it will rebalance more quickly, albeit in several years. Fitch believes that the lower stacking costs and more diversified operator base for jackups provide fewer economic incentives for operators to rationalize.
Customers are likely to favor incumbent drillers with working rigs, providing larger, established offshore drillers with an edge, which could lead to somewhat higher utilization rates relative to peers. However, day rates are anticipated to remain challenged and range bound, reflecting the market imbalance and economics required to put stacked rigs to work. Offshore drillers with solid liquidity profiles could exacerbate the market downcycle as each attempts to realize its respective fleet’s call option value. Fitch believes that this may heighten the cash flow pressure on and prolong the recovery, particularly for jackups.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.