Tickers in this Article: PDE, RDC, DO, MS
Recent earnings reports from offshore drillers highlights the difficult environment that this segment of the market finds itself mired in as 2010 gets started. The industry is facing an avalanche of new capacity and a shift in focus by the exploration and production industry away from the hunt for oil and gas offshore and toward land based unconventional resource plays.
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Pride International (NYSE:PDE) reported a net loss of $32.8 million, or 19 cents per share, in the fourth quarter of 2009. If you exclude several one-time items, including an accrual of $56.2 million for a liability related to the U.S. Foreign Corrupt Practices Act, the company earned income from continuing operations of $27.9 million, or 16 cents per share.

Pride International was unusually blunt in its appraisal of all segments of the offshore market over the next few years.

Offshore Outlook
Pride International noted that 22 newly constructed and uncommitted deepwater rigs were entering the market over the next two years, including five in 2010. Also, four deepwater semisubmersibles are currently idle, with another 12 with contracts expiring during the year. Utilization is still strong here, near 90% currently.

The outlook starts to go downhill quickly after the deepwater. The mid water segment has a utilization of only 80%, with 14 rigs idle and another 33 ending contracts in 2010. Another problem here is that with all the idle capacity in the deepwater segment, rigs here sometimes compete with mid water rigs.

The jack up market is the worst of all. Fifty rigs will be completed over the next two years, with 33 entering the market in 2010 and 17 in 2011. Most of this capacity was built on speculation without signed contracts. If that wasn't bad enough, 47% of all jack up rigs have contracts expiring during 2010.

Pride International does seem to be in better shape than the industry, with 100% of its total rig days contracted for in 2010 in the deepwater segment. The mid water and jack up areas are not as good for Pride International with 67% of available rig days for mid water and 26% of available days for jack up contracted in 2010.

Other operators may echo similar warnings when they report earnings. Rowan Companies (NYSE:RDC) owns a fleet of 32 jack up rigs, and reports on March 1, 2010. Not everyone is pessimistic on the future offshore rigs. Morgan Stanley (NYSE:MS) is positive on the group, with an analyst stating that demand will exceed supply in the jack up market by the end of 2010.

Diamond Offshore Drilling (NYSE:DO) reported earlier this month and saw net income of $1.98 per share, down 6% from the same quarter last year. During the conference call, management said that customers are still not looking to lock in term contracts and are most inquiries are of "short term" duration.

The Bottom Line
The offshore rig market is still suffering the impact of rabid overbuilding at the peak of the last cycle, and a rush into onshore plays due to the shale gas boom. These obstacles to recovery may hurt the industry for quite some time. (For more, see our Oil And Gas Industry Primer.)

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