Seismic faces further 10% decline in day rates

Earnings are likely to come under more pressure as vessels kept busy by multi-client (MC) work are set to come back to the extremely competitive direct-contract market

The seismic market has deteriorated further over the past few months and now companies are facing a tough winter season and falling rates, say analysts.

Day rates, which are already under pressure, could decline by 10% over the next two years (see table).

One reason is that multi-client (MC) campaigns have served as an artificial buffer to prop up day rates and have also obscured the market’s true vessel capacity, according to specialist analysts at DNB Markets.

The rush out of direct marine contracts, which is exclusive work for specific clients, has created a record large market for MC work, which more speculative in nature, fills data libraries and is largely funded by the seismic companies themselves.

This year, about 43% of the fleet is in MC work, which is well above the historical average of 27%, and the analysts believe smaller players simply cannot afford to shoot “poor” MC surveys anymore.

Pointing to the effort among seismic companies to reduce vessel capacity, the DNB analysts see less fleet growth over the next two years — 3% in 2015 and zero in 2016. But it predicts more streamer capacity as larger, more efficient vessels enter the market. They estimate a growth of 5% and 2% for streamer capacity over those same two years.

“We see continued challenges going into 2015, as there is overcapacity and rates are likely to be under pressure,” said the analysts.

“While there are few newbuilds, in our view the industry has been ‘hiding’ capacity in the multi-client market. As smaller players are now being forced to focus on cash flow, we expect less multi-client work and thus higher vessel availability in the contract market.”

Sales from data libraries have also started to decline and so far MC sales are down 5% to 10% year-on-year, driven by lower pre-funding, say the analysts.

Rising pressures in the seismic space have already been widely discussed and watched this year, in light of spending cuts on exploration and production (E&P).

As they are on the sharp end of offshore exploration, seismic companies, followed by drilling contractors, are typically the first to feel the direct effects of cuts in oil companies’ budgets.

While the offshore portion of E&P spending saw a compound annual growth rate (CAGR) of 22% from 2003 to 2008, it fell to a CAGR of 16% from 2010 to 2013. The DNB analysts are forecasting offshore E&P spending growth of 1.3% and total global E&P spending growth of 4.3% in 2014.

The DNB analysts say the “broadly flat” offshore spending outlook for the next few years means the seismic market is facing challenges that can only be changed by higher oil prices, as high as $130 per barrel, or by a drastic shift in oil company behaviour for more exploration activity.

The analysts declare themselves “surprised” by how bullish sell-side consensus remains on the seismic sector, saying they are below consensus by 44% for 2015 and 40% for 2016 for estimated earnings per share (EPS).

“While some names are approaching interesting valuation levels, we believe it is too early to be long on seismic names,” said the analysts. “Earnings over the next few quarters could disappoint, newsflow is likely to be negative and we believe consensus needs to come down.”