S&P Revises Outlook on Diamond Offshore Drilling (DO), Paragon (PGN) Following Segment Review (NE)

Standard & Poor's Ratings Services said today that it has taken the following rating actions following a review of its rated offshore contract drillers:

• We have revised the outlook on Diamond Offshore Drilling Inc. (NYSE: DO) to negative from stable and affirmed our 'A' rating on the company;
  
• We have revised the outlook on Paragon Offshore Ltd. (NYSE: PGN) to negative from stable and affirmed our 'BB' rating on the company; and
  
• We have affirmed our 'BBB+' rating on Noble Corp. (NYSE: NE) and removed the rating from CreditWatch, where we placed it with negative implications on Sept. 25, 2013. The outlook is negative.

We have taken these rating actions because we believe these companies are vulnerable to weaker credit protection measures over the next 12-24 months.

Recent weakness in the offshore drilling market prompted Standard & Poor's to review the ratings and outlooks on our rated offshore drillers. Following several years of robust spending on new vessels, drillers are facing the likelihood that capacity will outpace demand at least through 2016. According to Riglogix and Bloomberg, through 2016, there are an estimated 69 floaters entering the market, with just 33 currently contracted (48%), and there are 115 jack-ups entering the market, with just 18 contracted (15%). Driven by the expected supply, customers are bidding down day rates in the mid-water, deepwater, and ultradeepwater market, with the most sophisticated ultra-deepwater drillships, for example, falling to a day rate close to the $500,000 level, from a peak last year typically in excess of $600,000 per day.

We believe that new capacity will weigh on some issuers more than others. Those most vulnerable are likely to have a relatively higher proportion of the following:

• Mid-water rigs: The risk, in our view, is that older deepwater vessels unable to compete in the deepwater market will increasingly bid for contracts in the mid-water market. We believe that this will pressure rates and utilization for mid-water rigs.
  
• Older and less sophisticated rigs: Additional capacity is likely to exacerbate the dichotomy between newer and higher specification rigs and older rigs. This is because newer rigs can typically drill more challenging wells (i.e., deeper and in harsher conditions) and do so more efficiently and safely. As a result, we believe that older rigs will be especially susceptible to weaker day rates and utilization in the future.
  
• Issuers with near-term contract expirations or new builds without contracts: We expect most operators with recontracting risk in 2015 or 2016 to face weaker day rates than existing contracts. At the same time, uncontracted newbuilds could see rates below our expectations, given substantial capacity entering the market.

For the complete rating analysis on Diamond Offshore Inc., Noble Corp. , and Paragon Offshore Ltd., see Standard & Poor's research update on the respective issuer to be published following the release of this report.

Following our review of offshore contract drillers, the ratings and outlooks on the following issuers remain unchanged:

-- Ensco plc: BBB+/Stable/--;
-- Rowan Cos. Inc.: BBB-/Stable/--;
-- Transocean Inc.: BBB-/Negative/--;
-- Atwood Oceanics Inc.: BB/Positive/--;
-- Pacific Drilling S.A.: B/Stable/--;
-- Hercules Offshore Inc.: B/Stable/-; and
-- Vantage Drilling Co.: B-/Stable/--.

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