Ocean Rig UDW’s recently announced acquisition of a sixth generation drillship at less than 10% of its newbuild cost provides yet another signal of the dim market outlook for offshore drillers, according to Fitch Ratings. The $65m valuation will likely prompt creditors to take a more conservative view of offshore rig values, which could lessen recovery prospects in an offshore driller default scenario.
Ocean Rig did not indicate its immediate intentions for the uncontracted drillship built in 2011.
Fitch estimates that Ocean Rig could generate positive cash flow and earn an attractive return on capital, subject to any additional upgrade costs, with a day rate in the low-$200,000s if awarded a multi-year tender. This would be substantially below the $500,000-plus day rates these types of rigs previously fetched. Fitch does not anticipate the company will stack the drillship, since the costs would be a drag on liquidity at a time when Ocean Rig’s backlog begins to meaningfully roll off.
Recent market contracting precedents, including two Ocean Rig contract cancellations for convenience in February 2016, suggest that the company’s ability to secure a new multi-year contract will likely be a challenge.
The sale also establishes a new offshore rig valuation low and provides another data point following an Odfjell Drilling affiliate’s sale of a similar sixth generation drillship for $210m in March this year.
“The price difference suggests that the market for offshore rigs is highly illiquid and uncompetitive due to weak medium-term contracting prospects, uncontracted carrying costs, and challenged incumbent financial conditions,” Fitch said in a report. Fitch believes that creditors are likely to adopt a more conservative view of offshore rig values that will negatively influence prospective recovery in an offshore driller default scenario.