Indian offshore rig operators are set for a 30% 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.

The operators¹ 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, operating profit is expected to increase by a modest 5% this fiscal and surge next fiscal² as newer lucrative contracts kick in. 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.

Crude oil prices, which languished at $55 per barrel on average between fiscals 2016 and 2021, have increased to $86 per barrel on average since fiscal 2022. Higher crude oil prices have, in turn, incentivised increased capital expenditure (capex) in offshore exploration and production activities, driving up demand for offshore rigs. Indeed, global demand for offshore rigs has surged 11% since April 2022 (see Chart 1).

Supply, however, has shrunk as rig operators did not invest in new rigs over the past few years, given the prevailing non-remunerative day rates and poor revenue visibility. As a result, utilisation is currently above 90% compared with 75-80% in the past five years. This has spurred competition among oil producers to secure the scarcely available rigs, leading to a spike in global day rates.

The domestic day rates follow global trends since rigs are movable and can be deployed globally. As such, 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 book³ and lead time of 3-4 years for rig manufacturing indicate rig supply can increase only ~1% in the next 1-2 years. With global demand expected to remain strong and supply tight, day rates will stay firm.

Says Naveen Vaidyanathan, Director - CRISIL Ratings Limited, “Higher day rates will benefit domestic rig operators as existing contracts with lower rates get reset with higher-priced contracts. With ~20% of rigs redeployed in the second half of this fiscal and another 20% set to be deployed next fiscal, operating profit will spurt 30% higher in fiscal 2025 amid largely stable operating expenses.”

The higher profitability will also boost the return on capital employed of Indian rig operators to 7-8% next fiscal from 0-4% since fiscal 2018.

Says Ankit Kedia, Associate Director - CRISIL Ratings Limited, “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.”

That said, any acquisition of rigs at the prevailing high asset valuations could potentially deter the expected improvement in financial metrics and will bear watching. Similarly, regulatory changes could render certain rigs unfit for deployment and will be monitorable.

¹ This is based on a CRISIL Ratings analysis of domestic jack-up rig operators accounting for 50% of the domestic supply.
² Rig contracts are typically renewed 6-9 months before expiry of contracts and rigs get redeployed 3-6 months after contract expiry. Therefore, there is a lag of 9-15 months for bid-out day rates to reflect in revenue and profitability.
³ Order book is at a record low of 4% of fleet currently.