3 Offshore Drillers - Contract Backlog Comparative Analysis, Part IV

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Includes: HERO, VTGDF
by: Fun Trading

Summary

PGNPF, HERO and VTGDF are the last three offshore drillers in my analysis. All three have already suffered a harsh restructuring and are still struggling to survive.

The backlog situation is clearly showing that these three companies will not be able to survive very long, unless the tendering activity resumes strong and fast -- which isn't likely.

Most importantly, oil prices are the key to survival. Offshore drilling depends solely on oil prices above $50 per barrel.

The DPDS3, from Paragon Offshore

There are multiple subclasses within the general oil sector that have been deeply affected by the unprecedented crash in oil prices we are experiencing. In fact, the oil industry is going through its third crash in prices since the formation of the OPEC cartel in the 1970s. The first price crash came in the mid-1980s, a decade after OPEC's formation, that represents about 81% of the entire reserves of oil (according to the organization) in 2014.

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Subsequently, the second crash came at the onset of the Great Recession in 2008, when oil prices tumbled from over $100 a barrel to below $40. Finally, the third crash is the present decline, which began in September 2014.

Among the worst segment afflicted and without any doubt is the offshore drilling industry, where companies had overleveraged during good times and found themselves in a precarious financial situation when the market quickly turned sour. This is the source of the problem, and offshore companies had to get a high-level of debt, billions and billions of dollars, based on an expected optimistic future revenue. It is easy to blame them now that we know what happened, but it would not be totally fair because no one -- and I mean no one --was expecting this total collapse before September 2014.

This series of articles discusses and compares the order backlog (as of 4/1/2016) for key offshore drilling players, such as Transocean (NYSE:RIG), Noble (NYSE:NE), Ensco (NYSE:ESV), Seadrill Ltd.(NYSE:SDRL), Diamond offshores (NYSE:DO), Rowan Companies (NYSE:RDC), Ocean Rig UDW (NASDAQ:ORIG), Atwood Oceanics (NYSE:ATW), Pacific Drilling (NYSE:PACD), Paragon Offshore (PGNPF), Hercules Offshore (NASDAQ:HERO), and Vantage drilling (OTCPK:VTGDF).

Note: The backlogs indicated below are estimated, the best I could come up with given what I had. The numbers might differ slightly from what the company will indicate later, including bonuses, zero-rate time, special expenses, mobilization etc.

In Part IV, I will compare the three companies with the fourth largest backlog and their fleet status situation.

1. Paragon Offshore

Noble Corp. spun off Paragon Offshore in August 2014. Unfortunately, the new company ran into trouble almost immediately, and lost the business with Pemex-Mexico (8 jackups) and started to have problems with Petrobras-Brazil due to a dispute about its two drillships DPDS2 and DPDS3. Actually, Petrobras is disputing 380-day of backlog (DPDS3), which represents $130 million and the company is still negotiating the issue with Petrobras.

In November 2014, the company acquired Prospector Offshore, which was a huge mistake, in my opinion. The Prospector 1 and Prospector 5 were sold -- sale and leaseback transactions -- and both the Prospector 1 and Prospector 5 are leased back to Paragon for a five-year period.

The company decided recently to restructure part of its debt through bankruptcy. I am not very optimistic about the future of this company as I believe it will continue to struggle, even after emerging from this first bankruptcy. The reason is very simple to explain, and is quite evident when we look at the contract backlog.

Note: The repartition is based on the backlog generated by each segment in 2016.

PGNPF

4/1/2016

2016 2017 2018 2019 Day rate
DPDS3 Drillship 9 8 0 0 347
MSS2 Semisub 0,25 0 0 0 270
Jackups segment
Dhabi II 9 6,5 0 0 76
C 20051 2,05 0 0 0 135
M 1161 9 12 3,2 0 62
B 152 9 10,8 0 0 81
Noble Ed Holt 9 12 9,8 0 38
M 825 0 0 0 0 149
M 842 0 0 0 0 112
HZ 1 3,45 0 0 0 142
L 784 9 12 6 0 80
B 391 0,35 0 0 0 154
L 786 9 12 3 0 53
C 461 9 10,5 0 0 113
C 463 0,35 0 0 0 130
M 1162 9 12 12 1 85
M71 3,35 0 0 0 10
Prospector 1 5,55 0 0 0 110
Prospector 5 7,55 10,5 0 0 147
Total 103,9 106,3 34 1
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2. Hercules Offshore (NASDAQ:HERO)

Hercules Offshore is another troubled company that emerged from bankruptcy recently. The balance sheet was greatly enhanced and a huge part of the debt was converted to equity. The company still has over $400 million in debt, primarily due to the Hercules Highlander.

Unfortunately, the situation is not getting better, and again the contract backlog is showing this alarming trend. Basically, the company is surviving on the Hercules Highlander, which is about to start a five-year contract with Maersk in the North Sea. However, even with this new contract, the company will not be able to generate enough revenue to avoid an income loss on a regular basis. It's hard to be optimistic right now, but the stock price might offer a good opportunity.

HERO 4/1/2016 2016 2017 2018 2019 2020 2021 D-R
Highlander 5 12 12 12 12 7 225
Triumph 0 0 0 0 0 0 0
Resilience 0 0 0 0 0 0 0
Hercules 150 0 0 0 0 0 0 0
Hercules 173 0 0 0 0 0 0 0
Hercules 201 0 0 0 0 0 0 0
Hercules 205 0 0 0 0 0 0 50
Hercules 208 0 0 0 0 0 0 0
Hercules 209 0 0 0 0 0 0 0
Hercules 260 9 12 12 12 3,35 0 75
Hercules 261 9 12 12 8,9 0 0 63,65
Hercules 262 9 12 12 10,1 0 0 63,65
Hercules 263 0 0 0 0 0 0 0
Hercules 264 0 0 0 0 0 0 0
Hercules 266 0 0 0 0 0 0 63,65
Hercules 267 0 0 0 0 0 0 0
Hercules 300 0,5 0 0 0 0 0 55
Hercules 350 0 0 0 0 0 0 0
Total 32,5 36 36 31 12 7
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Liftboats revenue for three last months:

Liftboats Nov. 2015 Dec. 2015 Jan. 2016
Revenues in $ million 2.342 2.920 3.241
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Note: The contract backlog shows the jackup segment only. The company owns also a liftboat segment, with revenue around $3+ million/month or about $30 million/year.

3. Vantage Drilling (OTCPK:VTGDF)

Vantage Drilling is in really bad shape and had to go through a complicated debilitating restructuring, where common shareholders were left with almost nothing. I will not detail the situation here because it is not necessary, and I recommend avoiding the stock. However, Vantage's fleet is one of the most modern in the industry and might eventually be acquired at a distress level, later in 2017.

VTGDF 4/1/2016 2016 2017 2018 2019 D rate
Platinum Explorer 0 0 0 0 0
Titanium Explorer 0 0 0 0 0
Tungsten Explorer 9 12 12 0 305
Total Drillship 9 12 12 0
Emerald Driller 0 0 0 0 0
Sapphire Driller 1 0 0 0 75
Aquamarine Driller 9 5 0 0 80
Topaz driller 2 0 0 0 99
Total Jackup 12 5 0 0
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4. Backlog comparison (Cumul. Part I, Part II, Part III and Part IV).

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Total
RIG 2448 2517 1723 1440 1210 975 770 770 770 770 516 387 14296
NE 1669 1500 935 682 639 491 298 112 0 0 0 0 6326
ESV 1999 1801 823 461 0 0 0 0 0 0 0 0 5084
SDRL 1895 1770 780 368 85 0 0 0 0 0 0 0 4898
DO 1155 1508 1175 892 59 0 0 0 0 0 0 0 4879
RDC 1393 1150 356 61 61 61 61 87 0 0 0 0 3230
ORIG 1062 1052 476 196 196 147 0 0 0 0 0 0 3130
ATW 408 299 139 139 104 0 0 0 0 0 0 0 1251
PACD 599 292 215 144 0 0 0 0 0 0 0 0 1250
PGN 333 321 67 3 0 0 0 0 0 0 0 0 721
HERO 89 154 154 144 89 47 0 0 0 0 0 0 677
VTGDF 112 122 110 0 0 0 0 0 0 0 0 0 344
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Commentary and Analysis

PGNPF, HERO and VTGDF present a rather depressing technical profile. However, they are slightly different in their fleet composition.

Paragon Offshore and Hercules Offshore are in financial trouble because they are not really suited for an acquisition and revenues are tumbling. The fleet is old and unattractive, and as such I don't see much interest for an acquisition. HERO might, however, eventually get an offer from Maersk for the Hercules Highlander.

Vantage Drilling owns a more modern fleet (floaters and jackups) and is the perfect candidate for an acquisition at a distress level. It is not clear what will happen to the stock because most of the rigs are owned by OGIL and not VTGDF. However, the stock could eventually go up if an acquisition can be negotiated.

Most importantly, oil prices are the key to survival. Offshore drilling depends solely on oil prices above $50 per barrel. Under this threshold, no drilling can be considered economically sufficient. While it is late for these three OSDs, we should not lose patience.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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