The outlook for Gulf of Mexico (GOM) services remains muted through the second half of this year. While day rates improved from 2018, oil price uncertainty and operator commitments to GOM work continue to suppress a full-blown recovery. Management teams at service companies don’t foresee any meaningful increases to either day rates or utilization in 2H19 – both in the rig and OSV markets. RIG, NE, TDW and HOS, when referring to day rates and utilization, remarked that the market was improving but not supportive of sustainable margins.
RIG and NE both changed their fleet status reports to boost day rate transparency. We believe the increased disclosure is an attempt to persuade investors that day rates have improved. Additionally, we see this as a strategic move to defend margins and persuade peers to stop undercutting already unsustainable low rates. Sentiment from 2Q19 earnings calls indicates that most service companies expect the pace of day rate recovery to stagnate in GOM over the back half of the year.
Other offshore arenas appear to show some strength. Both HAL and SLB referenced tool and wireline tightness in the North Sea. RIG, NE and SDRL alluded to the contract strength of harsh-environment spec rigs in the North Sea, and there was a lot of discussion around the demand for high-spec jack-ups in the Middle East. Companies with global assets can afford to give the GOM market some time to tighten. OSV companies must evaluate the cost of moving vessels out of the GOM market due to Jones Act regulations. Moving vessels out of GOM for more favorable rates in the Mexican and South American markets would effectively tighten the supply of Jones Act-compliant vessels available to service the region.
Offshore service companies echo the call of their onshore brethren to defend operating margin rather than solely look to gain market share. The extended downturn forces companies, both large and small, to consider exactly what it takes to go to work and make a profit. Service companies sit at a unique crossroads – their services are absolutely necessary yet completely dependent upon the E&Ps. The behavior of service providers in bids over the next several quarters will demonstrate their conviction to defend operating margin, providing a read-through to the ultimate goal of regaining pricing power in their businesses (Figure 1).
FIGURE 1 | Offshore Rig Rates by Region