Offshore drilling rigs have never been the simplest of assets to value, but in an illiquid market the valuation process becomes even more muddled, writes David Carter Shinn from Bassoe Offshore.
Sale and purchase of offshore drilling rigs has never been a high volume business. Back in the ‘80s, there were only 300 or so rigs in existence, but the market was good, and the ratio of transaction activity to number of rigs was relatively high. Today, there are 1,000-plus drilling rigs (MODUs) in the world. While the number of rigs has increased by almost 300%, transaction flow over the past two years has become a sporadic trickle of its former slow, but steady drip.
Comparative transactions, including newbuild contracts and sale and purchase activity can, of course, be significant drivers in the value of a rig. Over the last two years, however, there have been virtually no newbuild orders, and only 12 rigs (excluding rigs sold for scrap) have been sold in the open market. As such, the current value of a rig must rely less on recent transactions than ever before.
But it’s not only the lack of transactions that complicates the rig valuation process. Values of offshore rigs are normally based on a willing buyer, willing seller, non-distressed basis. Many of the few transactions that have occurred during the market downturn have been distressed sales which, although they reflect a price point between buy and sell side, don’t necessarily represent the true bid/ask structure of the entire market.
In May 2016, during Hercules Offshore’s bankruptcy, Maersk Drilling purchased what is now the Maersk Highlander JU 2000 high spec newbuild jackup for approximately $200m compared to a build cost of $236m. This rig, however, had a drilling contract in the North Sea, making it less of a distressed asset. Six months later, Hercules, as part of their asset liquidation requirement, sold two Keppel Fels A Class rigs of comparable specification without contracts for $65m each. Other examples include the UDW drillship Cerrado sold by bankrupt Brazilian contractor, Schahin, in April 2016 to Ocean Rig for $65m. One month earlier, the Deepsea Metro II UDW drillship was sold to Chalfont Shipping for $210m.
Fleet diversity plays a major role
Beyond illiquidity in the market, the issue of valuation is further complicated by the fact that drilling rigs have become less standard than they were during the 80s newbuild boom. The boom during the 2000s through 2013 saw the advent of new generation rigs which had more variance in specification among themselves than older designs did. Technology and build quality now varies more than before and has a significant effect on a rig’s value. Especially with respect to floaters, water depth has increased so much that even rigs of the same design may be outfitted for vastly different water depths or equipped with other systems which cause the deviation of values to be more pronounced.
Add to this the fact that, when the market was good, many owners upgraded their old rigs. Although rig values are so low today that old vs. ‘upgraded old’ is relatively insignificant, there are exceptions which have enough of a material effect on a some rigs’ values to be relevant and make such rigs harder to classify within their segment.
Can rig valuation tables still be helpful?
Rig valuation tables are so standardised that their utility has been reduced to being primarily indicators of rig value trends. One reason for this is that fewer rigs fit into the standard boxes seen in valuation tables, but it’s not just that. As the market downturn has led to historically low utilization rates, the gap in value between a rig that is working and one that is stacked has become wider. Rigs cost more to build and have a higher amount of delicate and costly equipment onboard.
When these rigs are stacked, the potential destruction of value caused by extended periods of stacking, poor preservation, and high reactivation costs can cause wild fluctuations in value.
Making better values more accessible to the market
Even when rig valuation tables were more relevant, they still provided little more than a quick and easy indication of a rig’s value. A complete valuation performed by an experienced broker is, and will continue to be, the best way to ensure valuation accuracy. One must consider a wide range of commercial and technical factors to arrive at a value that can be substantiated in the market – even when there’s high liquidity.
The problem is that certified valuations are costly and take time to produce. Digitalisation, however, can play a role in modernizing and improving rig valuation data availability and accuracy.
While fully digitalizing the rig valuation process is perhaps still far off at best, we think there is a way to make more accurate values accessible to rig owners, banks, investors, and other industry players and analysts hence the debut last week of our own new Rig Valuation Tool.