Asset valuations become even more confusing as rig owners sacrifice rigs to stay afloat
Since January 2020, 58 offshore rig sales have been recorded, according to Bassoe Rig Analytics, including 10 sales for conversion to non-drilling applications, 12 sales for rigs that will remain active in the drilling fleet and a massive 36 for recycling (scrap). As we reported during December in a previous article: Offshore rig values take a $30 billion hit in just 12 months, the unprecedented challenges faced by the offshore rig segment last year meant values took a hammering.
With all the selling going on the two big questions rig sellers have are: what are these rigs worth and how should we sell them? The answers, which Bassoe Rig Values aims to come up with, aren’t always straightforward.
The accepted approach to a fair market rig valuation is to consider the premise of a willing buyer and willing seller and take a balanced view of the bid/ask value range. But what happens when this is not the case? Nowadays there are mainly unwilling (distressed) sellers and willing buyers (if any) represent opportunists looking for assets at exceptional low levels. Adding to this is a market in which equity prices have collapsed, financial support for assets is minimal with an absence of buying power from traditional parties.
That means we have seen wild deviations in transaction values, especially when rig owners prioritize market dynamics and future cash flows over current asset values. When all of a sudden, a rig owner sells a 10-year old rig for scrap, they’re saying, “hey, we don’t care if we lose millions of dollars today. We’d rather contribute to a more profitable supply/demand balance and the possibility of higher dayrates in the future.”
By looking at some of the deals done in 2020 we gain insight into the strategy and economics of selling a rig in today’s market. There’s far more to it than just price.
Drilling versus scrap prices
There are two markets: one for traditional S&P transactions and one for scrap. They command very different pricing.
First take 2012-built drillship Sertao (now called Kanuni), which was sold in 2020 on a willing seller, willing buyer basis. At the time of the sale Bassoe Rig Values valued it at $32–41 million and it was reportedly sold for $37.5 million to Turkish Petroleum for its domestic drilling purposes.
On the other hand, there were 2010-built Valaris DS-3, 2011-built Valaris DS-5 and 2012-built Valaris DS-6, which Bassoe Rig Values had priced at between $40–54 million on a willing seller/willing buyer basis. However, these units were reportedly sold for just $6 million apiece as, in this case, the owners elected to sell the rigs for recycling rather than for open use in the market where they would compete with them. In exchange for Valaris’ decision to scrap the rigs they were forced to take a price that was below the rigs’ market value.
An example of a similar “below value” deal was recorded in the jackup segment for Valaris 105, which was sold for just $2.5 million for scrap but was estimated to have been worth up to $13 million if sold for drilling purposes.
Thinking outside of the box with conversions
Along with all the recycling sales that were recorded last year, several transactions were completed for rigs to be repurposed for more unusual purposes and these also came with surprisingly low sale values. Shock buyer, SpaceX (owned by Elon Musk), purchased two semisubs – Valaris 8500 and Valaris 8501 – for conversion into offshore launch pads for its Starship rockets. The two units which Bassoe Rig Values had expected to be worth between $28–36 million, sold for a fraction of this at just $3.5 million apiece. Another example of Valaris offloading rigs for minimal return in a bid to reduce the number of competitive rigs in the market. Meanwhile, and quite on trend, there were some sales recorded for the conversion of drilling rigs into offshore wind turbine installation vessels – an interesting example of how excess rigs can be repurposed for the energy transition.
Distressed sales pushed down prices
In addition to scrap and conversion sales, distressed-asset sales also threw a few curve balls in terms of values. For example, the sale of the 2014-built jackup Perisai Pacific 101 to Icon Offshore shows that distressed assets also trade at a discount. This transaction by the rigs’ creditors was once again not a typical “willing seller, willing buyer” transaction and resulted in a below-market level sale of $41.8 million (Bassoe Rig Values estimated its value at between $51-$60 million).
However, not all distressed sales necessarily resulted in drastically lower than estimated sales prices. For comparison’s sake, 2013-built KFELS B Class jackup Dynamic Vision was reportedly sold by creditors to Orchard Offshore for $56 million, which was only slightly below Bassoe Rig Values’ estimation of $57–67 million.
ADNOC paid $78 million for a CJ46 jackup
On the other end of the scale, we saw the 2019-built GustoMSC CJ46-design jackup Shelf Drilling Journey surprisingly sold to its charterer ADNOC at a higher level than Bassoe Rig Values’ estimate. The rig had been valued at between $49–57 million but was sold for just under $78 million, with the price likely to have included the cost of ADNOC-specific technical requirements.
As a result of this sale, we increased values of this class of rig by 5–10%, but not as high as the actual sales price as there may have been additional aspects not disclosed to the market that justified the higher sales price.
Values still somewhat of an enigma
Back in October 2019, Bassoe Analytics published an article titled “Welcome to the real world, where offshore drilling rig values are an enigma” and it seems that very little has changed since then. There is still a lack willingness by investors and banks to finance rig acquisitions, day rates continue to be very low and there is increasing amounts of distressed or available supply in the market.
Nevertheless, the increase in sale activity in the last year can be viewed as a positive development for the overall market, even if most of these sales were for scrap rather than for drilling purposes. It is likely that 2021 will bring further scrap and conversion sales on completion of restructurings from several of the bigger rig owners and even more may follow if some of these firms merge. Additionally, it will be interesting to see if any of the stranded rigs in shipyards will be sold off (there are currently 14 drillships, 36 jackups and 4 semisubs newbuilds without any work prospects) and it will be even more curious to see who to and for what purposes as owners consider the best course of action for their future.
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Image attribution: Canarship