It’s Friday, so we’ll keep it short, but the news released by Transocean today warrants some attention. If you haven’t already read about it, Transocean announced the retirement of six deepwater and ultra deepwater floaters. Along with that, they swallowed an impairment of $1.4 billion.
Transocean, plus other rig owners like Diamond and Ensco, have made significant contributions toward reducing oversupply (and written down assets in the process), but there's still a long way to go.
Looking at the rigs, it’s interesting to see that moderately “newer” rigs (built or upgraded in the late 1990s and early 2000s unlike the slew of 70s and 80s built rigs we’ve seen go recently) in the deepwater segment are being disposed of. With the current state of the deepwater market, it shouldn’t be surprising that these rigs have had no future, but it’s not always easy (or possible) for owners to recognize this.
Out of nearly 100 rigs scrapped over the last three years, only 13 were delivered after 1998 – this includes three from Transocean, six from Ensco, three from Noble, and one from Odebrecht.
Our RVT has had values of these rigs at scrap levels for several months, but asset values on Transocean’s books were significantly (very significantly) higher than this. Considering the $1.4 billion impairment, we’re looking at around $230 million per rig.
Transocean should be applauded for this – and there could be further impairments coming as they have another 14 cold stacked floaters on their hands – but the real question is why aren't more owners following this trend?
The simple answer is that some of them probably can’t. Transocean has the financial power to do this, but what about the small rig owner with a fleet of a few rigs who’s full up on debt? Such a move would be extreme.
This, along with the fact that banks and investors don’t want to realize deterioration in asset values, is why we aren’t seeing more scrapping. But as the rig market continues to reset, we see more write-downs and retirements coming as more (especially larger) owners clean up their books.
Data: Bassoe Offshore, Transocean; Image attribution: main image by Michael Scott under the Creative Commons 2.0 License; image has been cropped