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Subsea contractors could face struggle

Some subsea contractors could go to the wall this year as they struggle to stay afloat in the wake of the global economic downturn.

A day of reckoning is coming for several companies, said Subsea UK chief executive Alistair Birnie. I do expect were going to see some casualties before year-end, he told reporters at OTC 2010.

Contractors are suffering from a lack of working capital, not a lack of revenue, according to Birnie. Companies are turning down work as they cannot finance it, he said.

It is not only smaller subsea contractors which are feeling the pinch and this has resulted in some companies having to refinance. There has also been a wave of acquisitions activity that has seen contractors buying revenue, capital and vessel capacity.

We have not seen the end of this, there will be more into the summer, noted Birnie, adding that it is certainly a possibility of some contractors not being able to keep their heads above water.

Some contractors have already approached clients, asking them to release more cash up front, although such a move can play into rivals hands when it comes to bidding for future work, he said.

Subsea UK in early 2009 contracted Douglas Westwood to compile a report on how four groups of contractors drilling contractors, subsea construction companies, oilfield equipment manufacturers and integrated oilfield service companies fared compared to analysts expectations.

Only equipment manufacturers last year outperformed expectations based on earnings per share while oilfield services companies saw EPS slump by a significant 35.7%. However it was not all gloom and despondency, said Birnie, noting that Aker and FMC posted higher profits despite lower revenues and a similar story is coming from Acergy.

He added that companies need to get a grip on business and drive down costs in areas where they dont need to be spent.

Looking ahead, 2010 is expected to be especially tough for drilling contractors with their EPS forecast to be 15% lower than last year. Dayrates for jack-ups and mid-water depth units are set to be relatively flat and there will be overcapacity when newbuild rigs enter the market in coming months, said Birnie.

Even so, the US and West Africa drilling markets are faring well and there is predicted to be a small increase in ultra-deep water units dayrates.

It could be a darn sight worse, he said.

EPS for subsea construction companies and oilfield equipment manufacturers are expected to also be lower than in 2009 while that of integrated oilfield service contractors is predicted to show a small increase, according to the report. Oilfield equipment manufacturers were the only group to, last year outperform analysts expectations, said Douglas Westwood manager Stuart Murphy