Burke: Positive indicators point to potential recovery first for shales; offshore must wait longer

In hindsight, the indicators of an impending downturn were clear back in 2014 or even earlier. Still, when it hit, the downturn caught most of the industry by surprise. This has caused massive disruptions as companies realized that their assumptions and projections were flat wrong, Thomas Burke, President and CEO of Rowan Companies, said at an IADC Houston Chapter luncheon on 11 October. Further, Mr Burke, who also serves as 2016 IADC Chairman, pointed to the difficulties that drilling contractors face in planning for their business. “When you have to make investments in expensive assets that are going to last a long time, it takes a lot of capital, and you have to make assumptions about what’s going to happen,” he said. “We have to make long-term decisions based on short-term oil prices.”

Over the next five to six years, Mr Burke predicts that drilling contractors will be much less aggressive than they have been, with many facing significant balance sheet issues. “They’ve been caught in a tough position financially because they went out on a limb.”

Positive signs are starting to pop up, however. CAPEX reductions are starting to slow, he said, with operators talking less about what they’re going to stop doing and more about what they want to do. “The other one is oil price predictions. They vary widely, but they’re all constructive to recovery, even the most bearish ones that I’ve seen,” Mr Burke said. One of the biggest reasons for these improving price predictions is reserve depletion. “Decline is real, and it’s going to catch up with us.”

This doesn’t mean that the industry should root for oil prices going back up to $120 or even $100, as those pricing levels are likely to lead to a resurgence in the renewables industry. “How many people today are talking about renewables? Think about when the oil price was $120. People were financing crazy schemes on renewables.”

When a recovery does happen for the drilling industry, light tight oil will most certainly recover first, he said. A recovery is in the cards for the offshore industry, too, but it will take longer. “I do think we’re going to see a really strong recovery in offshore drilling, but I believe that it’s probably two years out,” Mr Burke said, adding that 2017 will be another tough year. In this segment of the market, he added, the oil price is not the issue; capacity is the much bigger problem.

“That problem has to be worked through in the offshore drilling industry, and today we are in the middle of that. That’s why even when the oil price comes back up, on the offshore side it will take a little bit more time.”