Trøim and Fredriksen go all in on rig purchases while droves of investors look to jump on for the ride. If the market continues its recovery, they’ll do well, writes David Carter Shinn from Bassoe Offshore.
From a fortnight ago, there have been two offshore rig transactions involving 17 rigs. Some of the details are still not public, but two things are clear: rig values are now rising again; and a lot of people are betting on a full market recovery and a return to good times.
First, let’s recap what just happened. John Fredriksen, via a new entity called Northern Drilling, purchased the Norwegian sector, high spec semisub West Mira from Hyundai Heavy for a price of around $360m in a deal where Seadrill and the yard settled on Seadrill’s termination of the construction agreement. Along with the deal, Fredriksen signed a $400m purchase-option agreement for another Norwegian sector, high spec semisub, the Bollsta Dolphin, which Fred Olsen cancelled last year. Nearly simultaneously, Tor Olav Trøim (formerly Fredriksen’s number two, but now acting independently) via Borr Drilling, agreed to the $1.35bn purchase of Transocean’s 15 rig jackup fleet, of which five are undelivered Super B Class rigs at Keppel FELS.
Northern Drilling saw its share price rise by almost 50% in the day after its listing on the OTC exchange. Borr Drilling, with its private placement for funding oversubscribed, raised $800m from various investors in a matter of days.
The numbers work
Looking at rig values starting with the semisubs, our Rig Valuation Tool (RVT) showed at the time of the transaction a value range for a Norwegian sector, high spec semi from 2010–2016 in operational (drilling) condition to be $328m–$362m. The RVT does not value rigs which are not yet delivered, but using this as a reference point, we would say that the West Mira should be at the top of this range, or around $360m. In light of the purchase option on the Bollsta Dolphin, however, at $400m, we have slightly increased our values for new (delivered) semisubs in this class to $340m–$376m.
As the midwater, harsh environment semi market has little oversupply and a stronger outlook for demand compared to other segments, we will likely see values for these rigs rise further. Northern Drilling’s deal, while at levels in line with today’s market values, is at a discount of nearly 50% of the newbuild price of around $650m. Even if the market doesn’t recover to its highs of a few years ago, the upside on this deal outweighs the downside.
Individual asset pricing in Borr Drilling’s deal with Transocean is still not completely clear. What is clear is that on the face of it, the deal may seem not to be consistent with Borr’s previous acquisition of the Hercules rigs at $65m each. But that doesn’t consider the whole story.
Looking at the newbuild rigs at Keppel FELS, Borr actually paid a price which, while discounted, is near market values for the rigs. In the deal, Borr will take over the newbuild contracts for the five rigs at a price which carries a 20% discount resulting from Transocean’s 20% payment on the $220m original price of the rigs. In addition, the yard has agreed to $15m in further discounts, or $3m per rig, in exchange for an up-front payment by Borr of $275m and an agreement to take delivery earlier than Transocean’s deferred delivery dates.
So Borr will be paying around $172m, or $860m total, for the Transocean newbuilds. In an already oversupplied market with 107 newbuild jackups waiting to be delivered, upside at this price may seem limited. But what makes the deal interesting is that the cost of the newbuilds needs to be considered on an aggregate basis with the other ten delivered Transocean rigs.
For the ten delivered jackups Borr purchased, our RVT gives a combined value range of $500m–$730m. If we take $615m (the midpoint of this value range – which can be considered conservative given the rigs were owned by Transocean) and compare it to the price of around $490m paid by Borr ($1.35 billion minus $860m for the newbuilds), then Borr has purchased these rigs at a significant discount to market value. Some or all of that discount can then be ‘applied’ to the newbuild rigs, making that part of the deal much more justified. In other words, the newbuilds can be seen as being acquired at under $150m which is nearly an all-time low for newbuild jackups in this class.
With Borr’s unburdened balance sheet and their ability to enter the drilling market at current low levels, they look set to be better positioned than other contractors and will be a major competitive force in the market.
The yard has also come out a winner on this deal. While Keppel FELS made this commercial decision, the yard has only taken a slight loss on the rigs up-front while also freeing up capital. But the yard was able to do this only due to Borr’s ability to ‘subsidise’ the newbuilds’ cost using the discount from Transocean’s delivered rigs.
And for Transoceean, they have taken a loss, but eliminated future capital expenditure commitments and have consolidated into a market they would rather focus on: deepwater.
This is how money has been made in the past
Throughout the history of the rig market, high returns have been made on deals similar to what Northern Drilling and Borr have done. These players have come in early and taken advantage of special situations to position themselves for a recovery. They are part of the ‘reset’ taking place in the market and will have the fundamentals to compete and generate returns even in a lower dayrate environment.