Indian offshore rig operators are set for a 30 per cent spurt in operating profit in fiscal 2025 as strong global demand for rigs amid healthy crude oil prices keeps day rates elevated after doubling to ~$85,000 from last year’s level, said a report by CRISIL Ratings. The operators, it added, will benefit gradually as expiring rig contracts get redeployed at higher rates and the weighted average day rates improve to ~$60,000 by next fiscal from $35,000-$40,000 last fiscal.
As a result of this, operating profit is expected to increase by a modest 5 per cent this fiscal and surge next fiscal as newer lucrative contracts kick in. Further, the report stated that in the absence of significant investment towards addition of rigs, the growth will bolster the return and debt metrics of rig operators and strengthen their credit risk profiles.
Supply, however, has shrunk as rig operators did not invest in new rigs in the past few years, given the prevailing non-remunerative day rates and poor revenue visibility. This has resulted in utilisation currently being above 90 per cent compared with 75-80 per cent in the past five years, spurring competition among oil producers to secure the scarcely available rigs, leading to a spike in global day rates.
Notably, the domestic day rates follow global trends since rigs are movable and can be deployed globally. The day rates in India have recovered to ~$85,000 this fiscal from the average of $25,000-40,000 over the past six years.
A record low global order book and lead time of 3-4 years for rig manufacturing indicate rig supply can increase only ~1 per cent in the next 1-2 years, CRISIL Ratings said. With global demand expected to remain strong and supply tight, day rates will stay firm.
“Higher day rates will benefit domestic rig operators as existing contracts with lower rates get reset with higher-priced contracts. With ~20 per cent of rigs redeployed in the second half of this fiscal and another 20 per cent set to be deployed next fiscal, operating profit will spurt 30 per cent higher in fiscal 2025 amid largely stable operating expenses,” said Naveen Vaidyanathan, Director, CRISIL Ratings Limited.
The higher profitability will also boost the return on capital employed of Indian rig operators to 7-8 per cent next fiscal from 0-4 per cent since fiscal 2018.
Ankit Kedia, Associate Director, CRISIL Ratings Limited, said, “Despite improved profitability, domestic rig operators are unlikely to invest significantly in fleet expansion after witnessing prolonged subdued returns. This will result in a gradual strengthening of debt metrics. Financial leverage as measured by debt to earnings before interest, tax, depreciation and amortisation is expected to improve from 3.2 times in fiscal 2023 to below 2 times by fiscal 2025.”
In the light of this, any acquisition of rigs at the prevailing high asset valuations could potentially deter the expected improvement in financial metrics and will bear watching. Also, regulatory changes could render certain rigs unfit for deployment and will be monitorable, the report stated.