Interview: Rig values have bottomed out. Cold-stacked units unlikely to come back

Offshore Energy Today has recently shared several, very informative and interesting articles written by David Carter Shinn, a partner in the offshore rig brokerage firm Bassoe Offshore.

We’ve now decided to pick his brains on one of the subjects that matter most to the offshore rig owners – be it the big guns, or the smaller players – the offshore rig valuation.

The interview leans on the recent article written by David where he argues that, while it has never been a simple task to value an offshore drilling rig, it’s now even more difficult.

Q: David, after reading your articles, I have to ask, where have you picked up the in-depth knowledge of offshore drilling rigs?

At Bassoe Offshore, where I started working in 2008, our focus is on offshore rigs. We have a small, specialized team which covers all aspects of the offshore rig industry from commercial to technical and everything in between. We not only assist clients on newbuild, sale and purchase, and chartering projects, but have founded several rig companies (and built 21 rigs) as we look for trends and niche requirements in the market. Our knowledge comes from our experience and our narrow, but deep involvement solely within rig assets.

Q: While the wider energy news audience will be ever-interested in opinions on oil prices, what about rig prices? Who would want to know about that and why?

Yes, there’s a larger audience of people interested in oil prices, but there’s a significant segment of this audience which is interested in the offshore rig market. Asset values are always a key concern for rig owners, banks, insurance companies, investors, shipyards, and in some cases, even oil companies. Right now, values may be more pertinent than ever as refinancing is a major focus and the potential for S&P/M&A deals increases. Offshore rigs, as opposed to land rigs, are (normally) high value assets which have a material effect on a balance sheet.

Q: What are the key drivers of the value of a rig. It’s not only about the steel and equipment aboard, is it?

Steel and equipment are important as they give a foundation for the value of a rig, but also in that they create and define the value deviations within the fleet. But they cannot be looked at on their own. Previous transactions, oil price, dayrate (levels and trends), utilization, perceived condition and reactivation costs, the region the rig is located, and other technical factors must all be considered as inputs for the value of a rig.  How a rig’s technical capabilities match oil company requirements is also very important. The mix of these factors, and their relationship to each other, are what drives the process of determining value.

Q: David, can you expand on your view that in today’s world the value estimation for offshore drilling rigs is “even more muddled” than before? 

Newer generation rigs have remarkable differences in specifications which make the fleet less standardized and less comparable. Furthermore, as rig utilization is low, many rigs are stacked, and assets such as high spec 6th and 7th gen floaters have vast amounts of equipment onboard which, depending on how they are preserved, can cause extreme fluctuations in a rig’s value.

In short, there’s less transaction activity (which is dominated by distressed sales or rig scrapping), less rig contracting activity, and more technical complexity. All this makes values less straightforward, and increases variance.

Q: Can you name some recent interesting examples that prove your point?

In May 2016, Maersk Drilling purchased what is now the Maersk Highlander JU 2000 high spec newbuild jack-up from Hercules for approximately $200 million USD compared to a build cost of $236 million. This rig had a drilling contract in the North Sea. Six months later, Hercules sold two Keppel Fels A Class rigs of comparable specification without contracts for $65 million each to Borr Drilling in a highly distressed deal.

Then you have the Deepsea Metro II UDW drillship which was sold to Chalfont Shipping for $210 million in March 2016. One month later, the UDW drillship Cerrado was sold by bankrupt Brazilian contractor, Schahin, to Ocean Rig for $65 million. In November 2016, Borr Drilling tried to purchase the UDW drillship Sertão for $75 million. The offer was rejected by owners Dleif Drilling.

Q: In you article, you go back to the newbuild boom of the 80s. Why was it easier to provide a valuation for a rig then, than it is now?

Comparative transactions have always been one of the tools brokers use to estimate rig values. As we recently wrote, the offshore rig market has grown from around 300 rigs in the 80s to over 1,000 rigs today, but over the past two years, transaction flow has been disproportionately low compared to the growth in the fleet.

Sale prices are all over the place, and there are a lot of rigs out there that could be developed for sale. The issue is that when there is no functioning market – with low liquidity and extreme bid/ask spreads – combined with modern assets with high build costs and complex equipment, “real world“ values are harder to obtain.

Q: You’ve said that there is now a wider gap in valuation between a stacked rig and a working rig. Why so?

While operating a rig is the best way to maintain it, stacking is not necessarily bad if it is done properly. The problem today is that owners (and shipyards holding rigs for owners who have deferred delivery) are faced with a situation where they need to stack rigs for extended periods of time while also trying to reduce costs. As newer rigs have more complex and expensive equipment on board, the effect of improper stacking (i.e., with limited preservation and maintenance) can be devastating to a rig’s value. The majority of established drilling contractors have implemented programs to control reactivation risk after stacking, but yards are not experienced with long-term preservation and maintenance.

In any case, extended stacking of high spec rigs has never really been done before, so the outcome of this is still unknown, but must be considered when looking at rig values.

Q: Your company Bassoe has recently launched its own online rig valuation tool. Can you tell us more about it?

Bassoe Offshore’s Rig Valuation Tool (RVT) is a combination of digitalized, data-driven methods and human expertise which aims to provide a greater degree of valuation accuracy than other traditional (more standardized) valuation tables, for example. Users can generate values for a wider range of rig types and designs based on certain operational or technical criteria.

Rigs are not ships which have thousands and thousands of reference points. We think that a tool which takes technology and combines it with the market and technical knowledge needed to understand the dynamics of rig values is what’s needed to bring more transparency to a complicated and volatile market.

Q: If I’ve used the tool correctly, the Cerrado drillship Ocean Rig bought last year for $65 million would be valued around $200M today? This is for the cold stacked drillship? How does this tool work, and how accurate is it? 

Yes, the Cerrado was a stacked UDW drillship. When the transaction occurred last May, it caused quite a shock in the market as the sales price represented about 10% of the construction cost. The market was well aware that UDW drillships had taken a massive hit in values as the segment was (and still is) experiencing historically low utilization. The issue with this deal was that there were virtually no willing buyers of drillships at any price and there was one highly distressed seller, but this didn’t mean that UDW drillships were worth nothing – there was just no market for them. Such situations lead to transactions which are not necessarily representative of the predominating market values of assets. Borr Drilling’s failed offer for $75 million for the Sertão UDW drillship in December proves this.

The RVT works based on our view of what a rig would be worth based on a willing buyer, willing seller, non-distressed scenario with respect to the fundamental technical and commercial value factors that contribute to value.

Q: So, speaking theoretically, if we have two companies discussing a rig sales and purchase deal, can they say: “Oh, this is the price I’m asking, I saw the valuation at Bassoe.no?” Or is it a bit more complicated than that?

We’d love it to be that simple, but of course it’s not. The concept of the RVT is to get closer to a simpler, more transparent way to generate values for offshore rigs. The RVT takes into account the most significant factors that influence a rig’s value and provides guidance for groups/types of rigs which we think serves as a useful basis for comparing and tracking values of a wide range of rigs in a more accurate and automated way.

Q: To wrap it up, would you give us your outlook on the mobile offshore drilling market for this year and the medium-term? Is the worst over?

The worst may be over, but some segments might never get better than they are now. In general, we think that most older rigs (from the 80s and earlier for jack-ups and from the 90s and earlier for semis) will never return to drilling again if they are cold stacked, and once they become cold stacked, they become virtually out of the market. This trend will happen faster in places like the North Sea and slower in places such as India and the Middle East, but it will happen eventually.

On the newer rig side, high spec jack-ups and harsh environment semis have the best potential in the medium term while UDW will struggle with oversupply and oil companies’ lack of interest in developing higher cost deepwater projects. Overall, values have most likely bottomed out at this point, but the expected upward trend may be gradual.

Interview conducted by Offshore Energy Today’s Bartolomej Tomić