UPDATE 1-Seadrill sees bigger drilling market slowdown

Tue Feb 25, 2014 2:46pm IST

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OSLO Feb 25 (Reuters) - The global oil drilling market will slow by more than expected over the next two years as energy firms save cash for dividends and delay exploration, Seadrill , the world's biggest offshore driller by market capitalisation, said.

Oil companies are struggling with cash outflows, while they also need to spend more just to maintain production levels at their existing assets, where depletion rates are high, Seadrill said on Tuesday.

"Combined with a relatively high dividend payout and increasing development cost to bring new production on stream, oil companies have limited opportunities to fund exploration activities," Seadrill, the crown jewel is shipping tycoon John Fredriksen's business empire, said in a quarterly results statement.

"In this regard, 2014 and 2015 may show slower growth in activity levels than earlier anticipated," it added.

It added that it sees "limited value" in increasing its own dividend further and would preserve funds for buybacks or later dividends.

By 0913 GMT, Seadrill shares were down 6.4 percent, underperforming a 0.3 percent fall in the European oil and gas index.

Seadrill had been on an order spree, adding ultradeep drilling vessels in recent years, but said it would now focus on its existing fleet until it sees oil companies raise spending.

Rates in the ultradeep offshore market, the most lucrative segment, peaked close to $625,000 a day last year and have since fallen to around $575,000 for the so-called 6th generation rigs. Analysts have predicted that those rates will sink further to between $525,000 and $475,000 per day.

"Based on the fact that this pause in spending has not been caused by oil price declines gives us confidence that this is a momentary pause rather than a cyclical downturn," Seadrill said.

It expects its first-quarter earnings before interest, taxes, depreciation and amortisation (EBITDA) to be flat or lower compared with the fourth quarter following a number of operational issues with several vessels.

But it expects year-on-year profit growth above 20 percent in subsequent quarters, it added.

For the fourth quarter, the company reported a 27 percent rise in EBITDA to $768 million, just ahead of forecasts for $754 million in a Reuters poll of analysts. (Reporting by Balazs Koranyi; editing by Gwladys Fouche and Jane Baird)

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