With their acquisition of Paragon Offshore, Borr Drilling isn’t just a cool feat of financially-engineered asset playing anymore. They’re a real drilling contractor.
Ever since Borr Drilling embarked on their new premium jackup shopping spree a little over a year ago, the big question was: what were they going to do with all the assets they were hording (and how were they going to do it)?
With nice investor presentations – full of investment banker jargon and pretty charts – Borr’s pitches tactfully avoided describing exactly how they were going to win contracts and operate their rigs. They had no real operational organization and virtually no legacy with oil companies to allow them to compete for work.
They had a great story though. And investors loved it. It was pretty simple: buy a bunch of new jack-up rigs for a 30–50% discount and trust in Tor Olav Trøim to figure out a way to make money.
Borr either willingly or unwittingly had to develop into an operating company
In the beginning, some may have considered Borr to be an asset play with no intention of becoming a long-term, established contractor. The company could stack its rigs efficiently, wait for a rise in rig values, and sell everything for a profit. In and out.
As time went on, Borr continued adding assets. And, although jackup values rose (primarily as a result of Borr’s transactions), the prospect of Borr selling off rigs at higher prices faded as they eventually became too big for any of the established drilling contractors to acquire them.
Whether this was the plan the from the beginning or something that just happened over time, the quick sale and profit option became less tenable. So what could have started as a pure asset-flipping maneuver turned into a deliberate quest to become a fully-fledged drilling contractor.
But becoming a drilling contractor isn’t easy. You need management systems, operational experience, a range of qualified personnel, and a way to convince oil companies that you can drill safely and effectively for them. It takes time – and money – to transform from asset owner to asset operator.
Paragon Offshore is the answer
But instead of building their own operational organization, Borr instead decided to acquire it via Paragon Offshore.
Paragon, who emerged from bankruptcy and a restructuring in 2017, had little prospect for growth. All but two of their current fleet of 32 rigs are 35 years of age or older, and the company has scrapped (or sold for conversion) 11 rigs over the past year.
With the Paragon acquisition, Borr has gained much more than if they had developed themselves organically, and deal fits perfectly with all aspects of Borr’s strategy to be the world’s largest premium jack-up drilling rig owner.
Most importantly, as CEO Simon Johnson said: “[Borr is] acquiring an experienced organization, solid management systems, and quality assets at attractive prices. By integrating a very capable operating platform, Borr will be qualified based on the historical track record to tender, win contracts and operate in most jurisdictions.”
So Borr gets the Paragon/Noble systems and market legacy, a high-quality operational performance record, better access to key markets like the Middle East and North Sea, and two more new premium jack-ups (JU-2000Es from 2013/14). And they will combine all this with their fleet of shiny new rigs.
On top of that, they’ve secured Paragon’s 30 old rigs and can ensure that they stay out of the market. While most of these rigs were uncompetitive and would have likely been scrapped over the rest of the year anyway, Borr can control this process directly now.
Finally, they get a bit of backlog from the remaining few of Paragon’s rigs which have contracts. These can be assumed to generate a minimal amount of cash flow, but it’s something.
And Borr got it all for a good price
Our Rig Valuation Tool (RVT) values Paragon’s fleet at $282–349 million, with the two Prospector JU-2000s accounting for over $250 million of this value.
The transaction, where Borr pays $232.5 million in cash, values Paragon (with net debt of $35 million) at $267.5m.
If you assume that the backlog value Borr paid for is marginal, the transaction price is highly attractive for all that they’re getting out of the deal.
It’s not all risk free though
Yes, Borr struck a great deal, but they’ve already got 17 premium rigs they need to find contracts for (including rigs under construction). And now they’ll get two more rigs which need backlog (the Prospector 1 should be coming off contract in Q3 2018 and the Prospector 5 is apparently committed, but not contracted yet).
With Borr’s commitment to becoming a drilling contractor, they’re playing the same game as their competitors and will have to rely on operations to create value. The risk, of course, lies in finding contracts at high enough dayrates to generate meaningful cash flows for all these assets.
It won’t be easy, but Borr, already with Schlumberger as an owner and partner, will now have the infrastructure to deal with this challenge much better than they could have before the Paragon deal.
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