As the old stock price saying goes, it’s hard to catch a falling knife. Most people watch a stock drop and do nothing as it moves back up again. They end up losing out on a buying opportunity. But some take a risk and end up making money on the upswing.
The same thing is happening in the offshore rig market. Values for offshore rigs fell by over 50% from 2014 until 2016, and very few players took their chances and acquired assets at low prices. Ensco took over Atwood, Transocean swallowed up Songa, Shelf bought three rigs from Seadrill, but apart from them, no other major (and pre-existing) rig owners have made any significant moves in the low asset value environment yet.
That isn’t to say that other major rig owners don’t want to act. With huge bid/ask spreads on asset values, the sell-side (including shipyards) hasn’t been overly willing to offload rigs at bargain prices. And for many companies, accretive transactions considering current funding and share price levels is hard to come by. Either way, a lot of rig owners have missed out on acquisitions of rigs at low values. And now that values keep going up, opportunities are becoming scarcer.
Most of the rig transaction activity has come from newly-established owners like Northern Drilling and Borr Drilling who’ve been willing to pay a little more than market values for assets (at the time of the transaction), have major shareholders who know how to make money in the industry, and are willing to take risks.
The latest example of this is Northern Drilling’s acquisition of two drillships from DSME after Seadrill cancelled their construction contracts.
While the market was still hating deepwater, Northern Drilling looked the other way
First a quick recap. Northern Drilling acquired the 7th generation DSME 12000 design West Aquila and West Libra from DSME for $296 million each. Only 30% of the purchase price is payable up front, and delivery can be taken at any time until early 2021. Northern Drilling also took a purchase option on a similar drillship, the Cobalt Explorer, for $350 million which can be exercised if certain 3rd party doesn’t exercise their option on it for $405 million.
For years, everybody knew about the distressed drillships at DSME and Samsung HI. And nobody wanted them at “realistic-bargain” price levels or on reasonable commercial terms.
Most of the existing drillship owners already have enough drillships – they don’t really need more. Even at prices 50% lower than newbuild cost, they’ve gotta focus on managing the rigs they have.
At the same time, shipyards know that the market for speculative (non-established) drillship buyers is small. Drillships require a lot of capital not only to acquire, but also to manage (including stacking and operating). It’s not easy to sell these things and still retain some value.
Although sentiment in the deepwater market is much better than it was, as we pointed out in our last article, oversupply in the fleet is holding asset values down. And it’s the combination of the improving outlook in deepwater and low asset values which made Northern Drilling jump.
They could do this because they fill a unique role: they’ve got credibility, they’re agile, they can raise money, and they understand the assets.
And now that they’ve pulled the trigger on these two drillships (plus the option for the Colbalt Explorer), they’ve locked in bottom-level pricing. Anyone trying to compete for the remaining distressed assets is gonna have to pay more.
Nothern Drilling couldn’t have done a better deal
Last year, Northern Drilling was the first to bet on distressed harsh environment semisubs. They got the West Mira and Bollsta Dolphin CS-60s for prices up to 25% lower than the two subsequent CS-60s were recently sold for (to Hayfin and Odfjell).
Now, it looks like they’ll accomplish the same result in the drillship fleet.
The Bassoe Analytics offshore rig database puts values on comparable delivered 7th generation drillships at $271–300 after a recent 7% increase in values for such rigs. At $296 million per rig, Northern Drilling has come in at a perfect price level.
Drillships will be profitable again, but not at $600 million per rig. At $300 million per rig, it’s a completely different story. And, unlike the owners who have gone through restructuring processes to reduce book values on their delivered assets to workable levels, Northern Drilling has a flexible, long-lead delivery timeframe which they can use to wait for dayrates to rise and time the entry of their assets into the market.
There probably couldn’t have been a better time for Northern Drilling to make their next move in their opportunistic fleet expansion initiative. And they did it on terms that should work out very well for them.