Ocean Rig filed for Chapter 15 bankruptcy protection this week. Another lower-cost offshore rig owner is now emerging and will be a competitive force toward owners who are still restricted by high debt and legacy costs.
With around $3.7 billion in debt and a fleet of 11 drillships and two semisubs, of which only one has a long-term contract, another offshore drilling company kicks off a financial restructuring. While Ocean Rig’s restructuring should benefit the company, if not the current owners, the event will have an effect on the offshore rig market as a whole.
Hercules did it; Vantage did it; Paragon’s going through it; and others are struggling to hold on. In all of these cases, there are winners – even if the bankrupt company is completely liquidated as in the case of Hercules. Equity holders get wiped out, bondholders usually take a beating, and sometimes the company gets to reset itself and move on (Vantage) or a new company buys the assets “legacy cost” free (Borr Drilling in the Hercules deal).
“New” players cause concern for “unrestructured” ones
It is these “new” companies, however, with lighter balance sheets, which become everyone else’s problem. They’re able to offer competitive rates on their rigs compared to other drilling contractors who are still burdened by debt load and high asset book values. Vantage, for example, is the 2nd lowest bidder in the recent ONGC tender at around $112,000 per day for the Platinum Explorer. While Seadrill (who we’ll get to later) was lower by $4,000 per day with the Sevan Driller, Vantage offering such a rate for a 6th generation drillship shows the effect of their financial “de-burdening”.
At the same time, Borr Drilling and Nothern Drilling are picking up assets at current low market values and, in the same way as restructured rig owners, can outcompete their counterparts in the low dayrate environment. This is a concern for rig owners who have not (or cannot due to financial regulations in their country of domicile) restructured their balance sheets as a result of the multi-year and prolonged oversupply of drilling rigs.
Will there be more to come?
Yes. Among others, Seadrill is at the forefront right now. The company alone owns 66 rigs, most of which are modern and unlikely to be scrapped. Overleveraged with $14 billion in debt, a level which now far exceeds the value of the company’s assets, we expect to see some kind of deal ranging from a major financial restructuring to a fully fledged bankruptcy. In any case, the company will likely transform into a lower cost competitor with a large number of rigs who will significantly influence market rates over the next few years. As a result, we see rates being held lower even as demand increases. These lower rates will be profitable to some, but not to others.
Pacific Drilling is also in a similar situation. Their fleet of seven UDW drillships are encumbered by debt of over $3 billion, and discussions with creditors are ongoing. Some sort of agreement should be reached in the coming months, but the outcome will likely be the emergence of yet another low-cost drilling contractor.
Are financial restructurings the only way to survive?
No. There are better ways for more solvent rig owners to protect themselves from the growing herd of low-cost owners. This week, Noble, for example, announced their partnership with General Electric for the implementation of data-driven, predictive maintenance tools to improve operating efficiency for their rigs. Operational efficiency gains from this partnership will allow Noble to reduce costs and be more competitive on dayrates.
Also, this week, newly established Borr Drilling, who is already a low-cost driller, announced that Schlumberger had made a $220 million investment in the company which will allow them to provide more integrated services and gain better access to the market.
And earlier this year, Rowan entered into a joint venture with Saudi Aramco for the operation and construction of offshore rigs for the Saudi market. This will keep Rowan protected in the largest jackup market in the world.
To survive, there are several paths a rig owners can take to ensure they end up in a more viable position while the market recovers: financial “reset”; fleet restructuring (like Transocean’s exit from the jackup market via its sale to Borr Drilling); or a new operational model via technology or industry partnerships. Those who do not find some way to change and simply wait out the downturn because they have the current financial base to do so may end up finding it difficult to compete and suddenly land in a position where they eventually have to experience a major financial “event”.
The offshore drilling industry is changing as it moves toward improved market conditions. A proactive approach toward new ideas, differentiation strategies, and operational efficiency is a better alternative than restructuring, but those who want to thrive need to do something.