We’ve talked about Borr Drilling so much over the past few months that it may appear that they’re the only active rig owner in the jackup market. In this case, appearances don’t deceive.
Apart from Shelf Drilling’s acquisition of three Seadrill jackups and the four jackups included in Ensco’s takeover of Atwood in May of this year, 26 of the 33 jackup transactions this year have been initiated by Borr.
Although liquidity (sales) in the market for jackups is significantly higher now than it was during the past 2 years, Borr has contributed to nearly 80% of it. With over 60 jackups stranded at shipyards, high oversupply, and low jackup values, you’d think more acquisitions would be happening.
The problem has been, as we’ve said before, that rig owners (including shipyards with rigs under their control) have been reluctant to sell assets at the extraordinarily low values which most buyers have been willing to pay for them.
Borr, however, has found market-clearing levels for jackups at values which are still attractive compared to original build cost. The fact that Borr raised another $650 million in equity in a matter of days (in an oversubscribed transaction) shows that market agrees with their outlook.
As such, Borr is the jackup market right now, and they dictate values. Being the highest-volume player practically allows them to create a self-fulfilling prophecy for valuation trends.
The PPL transaction validated the market
If you’re going to buy a similar jackup today, you’re going to have to pay at least what Borr paid (in normalized terms, plus or minus based on specification and build quality) as pricing levels in the PPL transaction have crystalized a new, but higher, reference point for rig values.
Although shipyards and owners of stranded jackups in China and Singapore have been holding out for higher relative prices than the $139 million per rig price Borr and PPL agreed on, Borr’s transaction has narrowed the bid/ask spread with movement on both sides. But it’s more likely that, over the next few months, the bid will be forced to move toward the ask as sellers become more confident in a renewed, genuine interest for rigs at higher values.
But shipyards must be willing to accept more creative or flexible deal terms
PPL's willingness to finance around $800 million of the total purchase price of rigs was a key element to the deal. With that, Borr effectively received a seller's credit for two thirds of the cost of the rigs which includes no debt amortization until five years after delivery of each rig. PPL, in return, has secured some upside based on future values of the rigs where they can share an eventual appreciation in asset values.
We expect to see more conditions like this in future deals as yards are able to use them to entice owners to pay higher values for stranded assets. Yards which endeavor to be cooperative on risk sharing (as opposed to requiring buyers to bear all the risk on the timing of the market recovery) will offload their rigs earlier and at price levels which preserve more value than yards who cannot or will not assist buyers.
Rig Valuation Tool premium jackup values up over 30%; likely to trend even higher
Based on previous values in our Rig Valuation Tool, we’ve increased values for premium jackup rigs, with a bias toward new (or newbuild) 400ft rigs, by over 30% as a result of Borr’s transaction and our short-term outlook on the jackup market.
We see strengthening preferences (and higher values) for rigs with delivery dates one or more years out as the time to reach a full market recovery may still be years away.
As newer rigs continue to take work away from older rigs by accepting lower dayates, more old rigs will be forced out of the market. Eventually, this will lead to higher utilization and higher dayrates. The length of time this trend will take will determine how fast and how far rig values will rise, but there’s probably more room for jackup values to run.
The jackup market looks stronger than we’ve seen so far this year. That should also support further asset value growth as more owners attempt to secure newbuild jackups over the next six months.