We’ve been saying it for a few months: the offshore market looks better than it did six months ago. But there’s still a lot more improvement needed on the contracting side (and the supply side to a certain extent) to bring utilization back to healthy levels. Despite that, early bets on a sustainable recovery are increasing.
But it’s not 2010 again
Less than ten years ago, new-entrant rig startups could contract multiple rigs at yards in Singapore and China and raise money with little difficulty. Today’s private equity and institutional investors, however, are looking for promoters who know how to operate offshore rigs, have been successful before, and are willing to put their own money into the deal.
While equity in many of the major offshore drilling contractors can be acquired relatively cheaply, most owners have been in cash conservation mode (focusing their spending on properly maintaining the rigs they have – one would hope) or broke and struggling through financial restructurings due to overleverage. There are still a lot of companies with “baggage” out there, and investors want a clean slate with the prospect for higher upside.
With their peers incapacitated, “old-newcomers” like Borr Drilling and Northern Drilling saw opportunity to use low rig values combined with outside investor interest as a vehicle to re-enter the rig market. They’ve applied their experience and reputation to identify promising asset acquisition targets and provide the assurance investors require that they can make these deals work. This has allowed them to raise nearly $1.5 billion since January (in a matter of days each time).
Now it’s Shelf’s turn
Shelf announced this week that they will acquire three benign environment jackups from Seadrill for $225 million. This is another transaction where a drilling company has raised equity from the market to finance a transaction. In other words, new money came in to lock in low rig values.
Shelf, however, started at a different point than Borr Drilling and Northern Drilling. They aren’t a startup with no assets. They have a fleet 36 jackup rigs, relatively good utilization and backlog, and cost effective operations – but 34 of their 36 rigs are 25 years of age or older.
As such, they had to sell nearly 35% of their company to secure the equity to purchase the three Seadrill rigs. The pricing they reached in the end was below the bottom end of the expected share issue price ($8 vs. $10–13 estimated), but the equity was still placed in less than a week.
A good deal for both parties (all things considered)
At the time of the transaction announcement, our Rig Valuation Tool had a total transaction value of $224–255 million vs. the $225 million total price paid.
Here’s the breakdown:
- West Triton (Baker Marine Class 375; built 2007) – RVT range of $77–88 million
- West Resolute (LeTourneau Super 116E; built 2008) – RVT range of $68–78 million
- West Mischief (LeTourneau Super 116E; built 2010) – RVT range of $79–89 million
Shelf purchased these rigs to support their strategy of fleet renewal and position themselves in their key markets. At a $75 million average price per rig, they secured high quality assets (in the benign environment segment) at the bottom range of today’s already depressed values.
Seadrill took a book value loss on the rigs, but could sell them at this price and raise much-needed cash because the rigs only had just over $100 million of debt outstanding. These rigs are also in the lower end of Seadrill’s range of assets (i.e., less than 400ft water depth, not harsh environment, and not high spec).
Good rigs are hard to find
Considering oversupply, one would think that finding rigs to acquire in this market would be easy. But it’s not. Some owners (or yards) aren’t willing to take a large enough hit on price; some newbuild rigs aren’t built properly or in the right condition; some aren’t in the right location; some aren’t the right design or right age. The list goes on.
Deals that have been successful are those where promoters find rigs best suited to compete in the market going forward at values that make sense. They know what it’s going to take (and cost) to keep them properly maintained and can sufficiently assess “time to contract” risk. They’re also able (or prepared to) put the rigs into operations competitively and effectively. That's not something just anybody can do.
For now, the hunt goes on. We expect to see more transaction activity from more players throughout the year as the market reorganizes itself and bid/ask spreads come closer to each other. Newer assets (jackups, harsh environment floaters, and to a lesser extent, ultradeepwater drillships) owned by high quality owners or yards will be primary targets.
Image attribution: main image by Kevin Jarrett under the Creative Commons 2.0 license (image has been cropped)