Interview: Asset value aside, banks interested in rigs’ money making potential

Banks want to know offshore rig’s future earning potential, rather than the current value. This is per VesselsValue, a website providing value estimations for vessels and offshore drilling rigs.

In what it says is a response to banks demanding such data, VV has recently introduced “DCF Values for Mobile Offshore Drilling Units”

“We are being asked by banks to provide this value instead of Market Values for use in their loan calculations. Currently, many MODU values are below the total loan amount, which would normally trigger banks to arrest these assets. However, if they use Discounted Cash Flow (DCF) Values, the banks are happy to let the MODUs continue to work, as the banks have an idea for how much these vessels can earn,” VV said recently in a statement introducing the tool.

Offshore Energy Today has decided to learn more and dig deeper into what the tool can do, and what factors VV actually takes into consideration when estimating the rig’s future potential. For this, we’ve interviewed Charlie Hockless, VV’s head of offshore.

OET: Mr. Hockless, thank you for accepting this interview. Can you first tell us how you come up with a rig value, before we go into the new tool? I’m asking as you’ve said rig values can be below total loan amount. What factors are taken into account when providing the value of a rig?

VesselsValue started designing and building the original Market Value algorithm in 2009, launching cargo Market Values for specific vessels in 2011. This is a five-factor transaction-based model takes into account the age, size, type, features and earning sentiment in a given market and assumes willing buyer / willing seller, fair survey position and fair working condition.

After receiving repeated requests for offshore vessel valuations, VV launched the first automated and daily valuation service for individual OSVs in 2016. This was quickly followed by MODU values in 2017 and OCV values in 2018, providing market valuations for all Offshore vessels.

Each MODU is scored individually based on its features, such as the yard, gearing capacity, design, winterization / harsh and ultra-harsh, dynamic positioning, BOP capacity, accommodation etc.

At present, the MODU market is going through a large and dynamic transition phase, with both new and old players taking advantage of distressed assets..

The system then provides daily values by following the state of the earnings and second-hand transaction markets. Our earnings sentiment is calculated by using the combined rolling average of the long and short-term price of Brent crude. This gives a picture of overall market sentiment while incorporating short-term movement. Second-hand sales are fed into the system, which allows the model to continually recalibrate.

At present, the MODU market is going through a large and dynamic transition phase, with both new and old players taking advantage of distressed assets. By providing a DCF value (Discounted Cash Flow or Long Term Asset Valuation), customers of VesselsValue can now compare DCF values to Market values and look for those all important buy/sell/hold signals.

For instance, if you can purchase a MODU when the market value is lower than the DCF value, you could potentially earn more money over the course of its lifetime than you spent. Therefore, this is a buy signal. On the other hand, if the DCF value is lower than its market value, this implies you can sell the MODU for more than it will earn you for the rest of the vessel’s life.

OET: And now, how can you calculate a rig’s earning potential for the rest of its predicted life? What are the most important aspects you take into account?

Discounted cash flow valuations are used to measure the attractiveness of an investment opportunity. They can be used for individual assets of companies, making them relevant for MODU’s as many drilling companies are either going through Chapter 11 or restructuring & looking for outside investment.

Many investors not only want to know the fair market value of an asset, but they also take into account projected future cash flows: revenue, loan amortisation, short and long-term charter rates etc. which then need to be offset against costs such as drydocking, any off-hire days, the rigs daily opex and many more things that VV measures and takes into account with our DCF valuations.

Many investors not only want to know the fair market value of an asset, but they also take into account projected future cash flows.

VesselsValue provides assumptions based on our extensive research and figures provided to us from substantiated sources. These assumptions are MODU specific to reflect the differences in earning potential and running costs for MODU’s of the same type but of different specification and quality. The assumptions can then be modified by the client to suit their needs and provide the user with clarity in a market where data points are scarce and many investors are not so exposed.

Calculating end of life

OET: How do you even come to the “end of life” date for a rig – especially today, when there’s a bunch of rigs stacked, and it’s hard to tell whether they’ll return to the market or be sold for scrap metal?

Rig life or end of life is a factor that has in the past proved difficult to determine. Rig life is in effect a prediction about the future and therefore can be estimated from historical practices. By analyzing the fleet database of MODU’s, VesselsValue is able to determine their typical life cycle. If a MODU continues beyond its normal life we make the assumption that it will continue until the next major survey.

Through analyzing scrapping trends and lay up figures from the VesselsValue database, our analysts calculate a sensible end of life date for MODUs to be 30 years. However, if the client is an experienced operator of older rigs and would disagree with us, then this is one of the assumptions that can be modified in our DCF valuations

OET: You’ve said that banks could “arrest these assets.” Has this happened during this downturn? What would a bank do with an offshore rig without a contract?

We are currently experiencing one of the worst offshore downturns in recent times and as a result, we have observed cases of banks arresting MODUs. The normal course of action for a bank that has acquired a MODU without a contract is to sell it and recuperate as much of the outstanding debt as possible.  The last thing a bank wants is to take control of such a high specification asset: they do not have the experience or infrastructure to act as an owner/operator.

A well-known example of this was the Deepsea Metro 2 Drillship (10,000 FT, BLT Nov 2011, Hyundai Heavy Ind) which was sold by DVB at auction in March 2016 to Chalfont Shipping for USD 210 million.

A similar example is the Cerrado (9,843 FT, BLT Jul 2011 Samsung) which was bought by the sole bidder Ocean Rig for USD 65 mil at auction in Aruba in April 2016, where she had been arrested by her lenders.

Even more recently we have seen the sister to the Cerrado, the Sertao (9,843 FT, BLT Feb 2012, Samsung) being marketed for sale via auction after being arrested by her lenders in 2015 (she was subsequently withdrawn after only seeing best offer of c. USD 45 million).

OET: Can you provide some data for major drillers, when it comes to the difference between their fleet value and their fleets’ earning potential?

Maersk Drilling is currently looking into an independent listing early next year. We estimate the live value of their 23 MODUs at 3,389 million USD but the DCF value is USD 5,427.3 million USD. This is an indication that the company has significant upside in a depressed market.

A second example would be Pacific Drilling which has been in the media recently looking to restructure. Its live fleet is 1,066.6 million USD today with a DCF value of 2,545.8 million USD which is an attractive figure for potential investors.

To further demonstrate the point, please see below graphs showing the top 5 companies in terms of number of MODUs together showing their Market, DCF valuations and the difference between these 2 values together with the top 5 DCF drilling company fleet values.

OET: According to VesselsValue, what are the rigs (jack-up, semi, or drillship) currently out there with the biggest future earnings potential?

The live MODU with the highest DCF value is the Askepott, a 2017 built jack-up, owned by KCA Deutag. Its DCF Value is $612.82 million. However, the live MODU that has the highest DCF compared to it’s Market Value is the Bluewhale 1, a 2016 built ultra-deepwater semi-submersible Drill Rig, owned by CIMC Raffles Offshore. Its DCF value comes in at $552.39 million compared to a market value of $163.57 million.