Advanced Energy Systems (ADES) announced this morning that they've acquired three jackup rigs from Nabors for $83 million in a cash (75%) and shares (25%) transaction.
The names of the three rigs aren’t specified in the announcement, but they're most likely the rigs Nabors currently has on contract with Saudi Aramco: the Nabors 655; 656; and 657.
ADES also stated that they plan on acquiring two other stacked rigs from Nabors (likely the 659 and 660) in a separate deal which is already in the works.
If both transactions end up closing, Nabors will no longer operate jackup drilling rigs directly (although they’ll have an ownership stake in ADES). Their one cold stacked jackup, the Nabors 240, is expected to be scrapped.
You may recall that ADES purchased three similar rigs (Hercules 261, 262, 266) from Hercules Offshore in 2016 for $65.1 million. These rigs also had contracts with Saudi Aramco.
So what does all this mean for rig values? In our opinion, not much. The Nabors rigs are 40 years old on average, but they’ve got contracts with Saudi Aramco, one of the most desirable oil companies in the world and the one with the highest barriers to entry for drilling contractors. If these rigs were sold in the open market on a charter-free basis, they’d be valued at levels close to scrap values.
The contracts with Aramco for the 655 and 656 are supposedly ending this month while the 657’s contract runs until January 2019. But we assume that contract renewals from Aramco are either secured or close to being secured – as this would be the only reason a transaction like this would happen (ADES indicated in their announcement that multi-year extensions are, in fact, a condition precedent to the deal).
Another thing to keep in mind is that the estimated average dayates for the Nabors rigs are in the $60,000 range. Operating costs are also estimated to be lower than newer rigs from competitors in the region. And although dayrates for the renewed contracts will likely be lower than they are in the current contracts, the operating margins (EBITDA) on the rigs should be high enough to support the investment at the price ADES offered (assuming multi-year contract extensions).
As such, we consider this deal a “special case” which doesn’t reflect the charter-free values of the rigs. Based on that, we maintain our Rig Valuation Tool (RVT) values for old jackups.
Here’s an overview of the Nabors fleet from the RVT:
While it’s great to see more rig transactions happening, the ADES-Nabors deal could negatively impact the rebalancing (i.e., oversupply reduction) scenario for the jackup fleet. The potential here is that the deal will prolong the life and competitiveness of three (and up to five) old jackups at the expense of newer rigs. Looking at it this way, the deal brings more downside to the rest of the market than upside.
Data: Bassoe Offshore; ADES,; Image attribution: main image is author's own.