Transocean Folds Its Jacks As Borr Bets On Higher Oil Prices

| About: Transocean Ltd. (RIG)
This article is now exclusive for PRO subscribers.

Summary

Transocean agrees to sell 15 high-specification jack-ups to Borr Drilling.

Borr's purchase price is largely the assumption of liability.

Borr's acquisition of jack-ups is a bet that oil prices and offshore drilling recover.

You ever see a deal come across Bloomberg, and you simply shake your head thinking, "Someone's gonna make a whole lotta money in a few years"? Well, tomorrow's winner will likely be Borr Drilling. Borr Drilling ("Borr"), founded by Tor Olav Troeim and other former executives of Seadrill (NYSE:SDRL), announced that it had signed a letter of intent to purchase 15 high-specification jack-up rigs from Transocean (NYSE:RIG).

Ten of the jack-ups have been built and range in ages from 4 to 31 years young, and Keppel Corporation is currently constructing five of the jack-ups, with an anticipated delivery dates between 2017-2020.

Jack-ups are shallow water rigs, and typically operate in depths of less than 400 feet.

In the current sub-$50/barrel oil environment, capital-intensive offshore drilling, even if it's close to the shore, is uneconomical, which explains why many jack-ups have been stacked (i.e., idled) and day-rates have plummeted. Of the 10 operational Transocean jack-ups to be acquired, only 5 are currently contracted (2 of which expire before the end of May 2017, the anticipated close date of this transaction).

Dayrate on

Dayrate on

Projected Close Date

5/30/17

Estimated

Current

Previous

Expiration

Date

Contract

Contract

High-Spec Jack-Up

Constructed

Age

Date

Stacked

(Dollars)

(Dollars)

Days

Contract Backlog

1

Transocean Andaman

2013

4

May-17

$115,000

$150,000

2

Transocean Ao Thai

2013

4

Oct-18

$139,000

N/A

505

$70,195,000

3

Transocean Siam Driller

2013

4

Mar-18

$140,000

N/A

300

$42,000,000

4

GSF Constellation I

2003

14

Mar-17

$85,000

$150,000

5

GSF Galaxy I

1991/2001

26

May-17

$212,000

$212,000

$-

6

Transocean Honor

2012

5

Stacked

May-16

$112,195,000

7

GSF Constellation II

2004

13

Stacked

May-16

8

GSF Galaxy III

1999

18

Stacked

Jul-15

9

GSF Galaxy II

1998

19

Stacked

Sep-15

10

GSF Monarch

1986

31

Stacked

Jul-15

Although the current oil environment is harsh on offshore drillers, on balance we can see this as nothing but a great deal for Borr. Borr has agreed to pay $1.35 billion for the 15 jack-ups, which includes assuming the payments for the remaining 5 jack-ups currently under construction. As of December 31, 2016, Transocean had already paid $280 million of the total $1.42 billion to build the jack-ups, which means the residual liability is "only" $1.14 billion (i.e., close to 85% of the purchase price), or $227 million per rig over the next three years. Borr was then able to further reduce the price down to $216 million with Keppel.

Construction-in-Process

Costs Paid @ 12/31/2016

2017

2018

2019

2020

Total

1

Transocean Cepheus

2017-2020

$57,000,000

$6,000,000

$8,000,000

$12,000,000

$207,000,000

$290,000,000

2

Transocean Cassiopeia

2017-2020

$59,000,000

$6,000,000

$3,000,000

$12,000,000

$195,000,000

$275,000,000

3

Transocean Centaurus

2017-2020

$57,000,000

$6,000,000

$8,000,000

$12,000,000

$207,000,000

$290,000,000

4

Transocean Cetus

2017-2020

$54,000,000

$-

$7,000,000

$10,000,000

$209,000,000

$280,000,000

5

Transocean Cirinus

2017-2020

$53,000,000

$-

$4,000,000

$10,000,000

$213,000,000

$280,000,000

$280,000,000

$18,000,000

$30,000,000

$56,000,000

$1,031,000,000

$1,415,000,000

Deposited

$280,000,000

Residual Costs

$1,135,000,000

Residual Cost Per Rig

$227,000,000

Renegotiated Borr Costs per Rig

Conversely, this also means Borr will acquire the remaining 10 already built rigs for $210 million, but since two of the rigs have contractual backlogs of close to $100 million, Borr is essentially acquiring the 10 rigs for $100 million, or about $10 million apiece. For a comparison, Borr similarly acquired two rigs (built in 2013) from bankrupt Hercules in December 2016. Purchase price per rig? $65 million each.

Four of Transocean's rigs are under five years old and had cost approximately $300 million to construct. In 2014, the company's rigs contracted for over $180K/day, or more than $60 million a year. Yetm with the precipitous fall in oil prices, many of these rigs have now been stacked, and as apparent here, are considered almost worthless.

A Fire-Sale

So why the fire-sale? Well, for Transocean, a company with $8.5 billion of long-term debt due, the potential capex overhang to finish the five remaining rigs would have complicated its ability to renegotiate the corporate credit line. Thus, reducing long-term capex commitments, particularly on assets that may/may not generate cash flows soon, insures that Transocean survives. The company will likely spin this as an opportunity to refocus its business on the more lucrative deepwater semi-submersibles and drill ships, which could command much higher day-rates in a higher oil price environment. This wouldn't necessarily be untrue, although arguably, the market for jack-ups could recover first before deepwater drilling recovers. Quite honestly though, nothing's perfect when you're heavily indebted. It's a bit of selling the family property in order to keep the business - no great options, just options.

For Borr, however, which has concurrently announced an $800 million capital raise, this is no doubt an asymmetrical bet on higher oil prices. In just a few months, the company has acquired 17 jack-ups for a fraction of their replacement cost; and even if the company decides to scrap the older rigs, it will still have over a dozen jack-ups with an average age of 5 years or less. For all the talk of the rise of shale, death of offshore drilling, and the re-emergence of OPEC, Borr is taking the billion-dollar bet that offshore drilling will still be needed in the next few years. Largely funded by equity, it has the luxury of waiting for an oil recovery.

We've been bullish on oil prices for the past year, and we believe the unprecedented cut to E&P capex, coupled with OPEC's production cut, will eventually lead to an oil shortage and higher oil prices. Borr's wager is certainly the same, but thanks to Transocean's desperation, its now playing with some house money, and in a few years, it'll likely be able to say "cash me out."

As always, we welcome your comments. If you would like to read more of our articles, please be sure to hit the "Follow" button above.

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.