The Dark Side to Falling Oil Prices: In What Way has the Decline in Oil Price Affected the Financial Health of Oil Service Companies and Who are the Likely Default Candidates?

Abstract

The continuous decline in oil prices has throttled oil companies’ demand for oil services, putting the livelihoods of the whole oil service industry at risk. In addition, most of these companies have aggressively accumulated assets during the past decade, with the help of cheap bond and bank financing. As demand for oil services has deteriorated, day rates and utilization for drilling rigs, offshore supply vessels, subsea vessels and seismic vessels have taken a nosedive. All of these oil service segments are also characterized by significant overcapacity, adding to the overall depressed market sentiment. With this thesis we aim to answer in what way the decline in oil price has affected the financial health of oil service companies and try to pinpoint the companies that are in the worst position and likely to default. Our findings suggest that the market downturn for oil services has had the most adverse effect on the drilling and offshore supply vessel sector. However, the seismic company Seabird Exploration, and the three offshore supply vessel companies Solstad Offshore, Havila Shipping and Farstad Shipping are the companies we consider as likely default candidates. We believe a successful restructuring process will be required to secure the continuing existence of these companies.