Another Victim Of Low Oil Prices: Diamond Offshore Drilling Files For Bankruptcy

Diamond Offshore Drilling (DO) voluntarily filed for bankruptcy protection on Sunday, one day before oil prices plunged by more than 25%.

Diamond became the second major U.S. oil firm to collapse, coming somewhat after Whiting Petroleum (WLL) filed for bankruptcy earlier this month.

The decision to file for bankruptcy protection came after Diamond failed to make an interest payment and said it retained restructuring advisers to map out a new future.

"After a careful and diligent review of our financial alternatives, [we] concluded that the best path forward for Diamond and its stakeholders is to seek chapter 11 protection," said CEO Marc Edwards. "Through this process, we intend to restructure our balance sheet to achieve a more sustainable debt level to reposition the business for long-term success."

Diamond cited, among other things, that day rates and demand for its services “worsened precipitously” this year amid a “price war” between Saudi Arabia and Russia and the huge drop in oil demand as a result of the coronavirus pandemic.

Noting that it recently drew $400 million under a revolving credit facility, Diamond said “the financial and operational conditions of the [company] have continued to deteriorate in the weeks following such responses.”

Diamond said it currently has “sufficient capital to fund its global operations in the ordinary course and to make continued investments in safety and reliability during the reorganization proceedings and does not require additional post-petition financing at this time.”

However, Diamond’s problems long preceded the turmoil of 2020 – the contract driller lost $357 million in 2019, almost double the figure from the prior year, as revenues dropped by 12%.

Over the past five years, Diamond has incurred total losses of $1.2 billion.

As of Dec. 31, 2019, the company reported almost $2 billion in long-term debt and only $156 million in cash.

Now, Houston-based Diamond, which has 2,500 workers, is throwing in the towel as contract drilling activity has virtually ceased.

The five largest oil companies in the west -- Exxon Mobil (XOM), Royal Dutch Shell (RDS-A), BP (BP), Total (TOT) and Chevron (CVX) – have cut spending by an average of 23% due to the pandemic. This means many other oil service firms like Diamond will likely also collapse.

Diamond has huge operations in the Gulf of Mexico – where Chevron, BP and other majors have cut deepwater drilling projects. The company also has projects off Brazil and in the North Sea

Diamond was at a particular disadvantage since it focuses exclusively on offshore drilling, which is far more expensive than onshore drilling.

Diamond’s majority stockholder, with a 53% stake, is conglomerate Loews Cos. Inc. (LOW).

In an SEC filing, Loews said it expects to record a “significant non-cash” charge in the second quarter of 2020 in connection with Diamond’s bankruptcy. Loews’ carrying value of Diamond was $1.5 billion as of Dec. 31, 2019

Diamond ’s largest individual creditors are Bank of New York Mellon (BK) – with $2 billion in claims – followed by National Oilwell Varco (NOV) with $6.2 million in claims.

James West, an analyst at Evercore, expects more oil drillers to go bankrupt or at least seek to renegotiate their debt structure. Smaller companies will be the first to go, with larger players surviving the shakeout.

“Offshore specifically you’re going to have to [merge] some companies together,” he said.

A few days prior to Diamond’s bankruptcy, John Caruso, senior market strategist at RJO Futures, also predicted the demise of some U.S. oil drillers.

“We've already seen a couple of companies that have ... filed bankruptcies over the last week. I think it's going to be very, very difficult for a lot of these [U.S.] oil drillers to actually survive this scenario,” he said. “What we've seen on the demand side of the market has been completely unprecedented. We're losing 25 to 30 million barrels a day that has come offline since the onset of the virus.”

Rystad's head of shale research, Artem Abramov. warned that oil priced at $30 per barrel “is already quite bad, but once you get to $20 or even $10, it's a complete nightmare. At $10, almost every [American exploration and production] company that has debt will have to file Chapter 11 or consider strategic opportunities."