Offshore Drillers Poised to Relive 1980s Nightmares

 | Feb 18, 2016 | 5:50 PM EST
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How bad is 2016 going to be for drilling companies?

The present climate is in some ways reminiscent of the 1980s, when the industry faced a similarly glutted market and many companies restructured or outright filed for bankruptcy amid prolonged low energy prices.

In a report released on Tuesday, Deloitte said that 175 exploration-and-production companies, or nearly 35% of global E&Ps, were at "high-risk of slipping into bankruptcy in 2016." Over the 18-month period ending on Dec. 31, 2015, 35 E&P companies with a cumulative debt of nearly $18 billion filed for bankruptcy protection.

Indeed, Deloitte's prediction appears prescient as recent weeks have brought news of troubled oil-and-gas companies deferring interest payments and seeking "strategic alternatives to strengthen its balance sheet."

"The ability of these companies to service debt and access financing is hindered by the continued depressed oil and gas prices," said Tad Davidson, a bankruptcy and restructuring attorney with Andrews Kurth, a Houston-based law firm. "These companies are looking for a comprehensive balance sheet restructure/fix that will allow for the ability to service a sustainable debt load and access capital in the future to take advantage of a future recovery in oil and gas prices when it happens. "

One company potentially facing trouble is Transocean (RIG), which saw its price target lowered to $2 from $6 by an analyst team at Citigroup led by Scott Gruber on Thursday. The company is also a member of Real Money's "Stressed Out" index.

Among the reasons listed for the Switzerland-based offshore driller's lowered price target, Gruber said Transocean's discounted cash flow fair value falls into negative territory due to company retiring more of its rigs. Furthermore, Gruber notes that the present value of Transocean's cash burden is "insufficient" to service its debt but he added that a liquidity crunch was not "imminent."

According to Transocean's third-quarter filing with the Securities and Exchange Commission, it had $8.6 billion in long-term debt with $1.2 billion scheduled to mature by the end of 2017. Its debt is currently rated BB+ by Standard & Poor's Ratings Services and many of its notes maturing after 2020 are quoted below 60 cents on the dollar, according to data provided by Thomson Reuters.

A key marker for the companies that may file for bankruptcy protection is the deep discounts at which the companies' public debt trades, attorney Buddy Clark told Real Money while speaking more broadly about trouble in the industry. Clark heads the energy practice group at Houston-based Haynes Boone. 

Representatives from Transocean did not immediately respond to requests to comment.

Times have been tough for Transocean as it has seen many of its contracts terminated over the last few months. Most recently, Murphy Oil (MUR) terminated its contract for an ultra-deepwater drillship earlier this month. In December, Royal Dutch Shell (RDS) and Statoil terminated contracts with Transocean. In all instances, Transocean received at least partial payment for the terminated contracts.

The company also announced plans in November to delist from the SIX Swiss Exchange. A spokesperson for Transocean told Reuters that the expense of listing on multiple exchanges motivated the decision.

Transocean is expected to report earnings next week. In its third-quarter earnings release, the company reported earnings of $0.87 per share. Its revenue fell 23% from the second-quarter to $885 million due to lower fleet utilization. Additionally, Transocean had $2.2 billion in cash and cash equivalents, down 22% from the third quarter of 2014. Shares of the company closed at $8.66 on Thursday and are down 49% over the last year.

The circumstances Transocean and other drilling companies find themselves in bear some resemblance to the troubles oil companies dealt with in the mid-1980s.  During that time, many then-big energy names faced similar financial troubles: low commodity prices and high debt burdens. The following passage from a 1981 New York Times article almost looks like it could be written today:

"When OPEC failed at its meeting last month to come to an agreement on cutting production, and thus taking the edge off the glut, the price impact was quick to be felt."

Interestingly enough, Transocean eventually acquired a company which filed for Chapter 11 protection in 1986. Global Marine filed for protection after it defaulted on $1.1 billion in debt, according to a piece from the Times. The company eventually emerged from bankruptcy protection and later merged with Global Santa Fe Corp. in 2001, which merged with Transocean in 2007.

Elsewhere in troubled companies from the 1980s, Blocker Energy, which was rolled up into Ensco (ESV), did a debt for equity swap in the early 1980s in order to stave off a bankruptcy filing. In a 1985 article in the Times, founder John Blocker characterized debt to equity swaps as a "funny voodoo kind of thing" but that all that mattered was that company was "alive and kicking."

Meanwhile, Ensco faces a similarly difficult climate as its predecessor did over 30 years ago. Shares of Ensco are down 71% of the last year, and while its debt is still rated BBB by Standard & Poor's Ratings Services, many of its notes maturing over the next five years are quoted below 60 cents on the dollar, according to data provided by Thomson Reuters.

As a quote often attributed to Mark Twain (perhaps incorrectly) states: "History doesn't repeat itself, but it does rhyme." For the inheritors of troubled energy companies from the 1980s, it may be a valuable lesson.

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