ShippingWatch

Maersk Drilling CEO says oil rigs have likely hit bottom

2019 looks likely to be the year when the highly strained rig market hit bottom, Maersk Drilling CEO Jørn Madsen tells ShippingWatch. Now companies must convince investors that things will improve.

Photo: PR/Maersk Drilling

Maersk Drilling's chief executive officer says it looks like the highly strained market for oil rigs hit bottom last year.

In an interview with ShippingWatch, CEO Jørn Madsen says rates improved at the end of 2019. Now he hopes that rig companies are on the verge of a long-awaited recovery after five lean years.

"One should always take care not to draw overly sharp trend lines based on available data. But examining the market, it looks like 2019 marked a low-point in terms of rates. These then increased during the year, and that trend has continued into 2020," he says.

I can only work with the numbers we have, and they indicate that things will improve

Jørn Madsen, CEO, Maersk Drilling

The CEO says his optimism is based on an increased number of tenders from oil companies, a higher utilization rate as well as the rate level, which rose at the end of last year.

At the end of 2019, Maersk Drilling as well as several competitors like Seadrill closed deals at prices that were higher than in recent years.

In 2018, Maersk Drilling signed contracts worth USD 503 million, while the company managed to secure assignments for USD 828 million in 2019.

Madsen is also pleased that the contract are becoming longer. Maersk Drilling itself entered a three-year contract with Japanese oil firm Inpex.

"There are more of that type of contract coming, longer than a year and also extending to three or four years. That's positive for the market, as it locks in capacity. Of course, we hope that our capacity will be locked in, but if not, it will take capacity out of the market," says the CEO.

Older contracts expired

Although things are looking brighter, there is still quite a way to the level seen during the last rig market upturn, which ended in 2015.

This is also evident in Maersk Drilling's annual report for 2019, which saw a deficit of USD 113 million after taxes, while revenue and the operating result also declined.

Madsen now has a big job in explaining to the stock market why it is worth waiting for better times. Since Maersk Drilling was listed in April 2019, its share price has seen a steady decline, now at about DKK 375 (USD 55.3) per share against a price of DKK 555 at the time of the IPO.

However, he thinks that there are enough investors who see that it is a good investment in the long term.

"I can only work with the numbers we have, and they indicate that things will improve," he tells ShippingWatch.

Moreover, he urges investors to show understanding for the potential bumps in the road toward better times. Several long-term contracts, which Maersk Drilling entered when times were better, are also beginning to expire, pushing results down.

"Investors need to be aware that some of what we delivered in 2019 was still based on contracts signed quite a while ago, and at a somewhat higher level. Going forward, the newer contracts will be the ones having an impact. We are done with these legacy contracts, and as such, we will from now one live off agreements more in tune with the market we're currently in," Madsen says.

Oil companies disappoint

In recent weeks, oil companies have shown worrying signs, with a number of the largest players presenting disappointing numbers. Among these are BP, Shell and Exxon.

However, Madsen does not see an immediate impact on rig companies.

"We look at the activity level, and we're seeing it go up. Even if capital investments are flat, this in fact means higher activity because the industry has become more efficient," he says.

For the full year 2020, Maersk Drilling expects an operating result (EBITDA) before special items of USD 400-450 million. In 2019, this figure was USD 415 million.

The spread in this year's expectations is there because the company still need to secure work for some of its rigs.

"We have to tell the markets that we still need to win the contracts. As such, we don't know the lengths of the contracts, and we don't know if there'll be downtime. That's why we have this guidance for our EBITDA," Madsen says.

English Edit: Jonas Sahl Jørgensen

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