There was an interesting discussion in the comments section of my recent articles on offshore drilling: Sete Brazil is trying to sell four rigs, and everyone is trying to guess who will be the winning bidder and how the transaction will influence the situation in Brazil - the ultra-important market for ultra-deepwater drilling.
The story began back in 2018, when Petrobras (PBR) agreed to take four rigs on 10-year contracts with a dayrate of $299,000. The challenge for Sete is that it is plagued with debt and has to sell the rigs so that its creditors can get back at least a tiny part of their investment. However, the sale process took long as it was hard to find a bidder at a reasonable price. Market participants questioned the economics of the deal as the buyer will have to complete rigs' construction.
Source: Bassoe Offshore
A website called Brazil Energy Insight (BEI), originally recommended by readers, proved to be a timely source of information regarding Sete rigs, so I'll rely on it. As of late March, the possible bidders included Seadrill (SDRL), Borr Drilling (OTCPK:BDRLF), Odfjell (OTC:ODJAF), Transocean (RIG), and Ensco (ESV). However, as per early April, Keppel FELS shipyard and Magni Partners (Borr Drilling's shareholder) were listed as the only bidders who formalized their interest.
As the information is not official, investors and traders should take it with the necessary grain of salt. However, the list of contenders, as well as the list of the "surviving bidders", makes sense:
- Seadrill has drillships West Saturn and West Tellus drilling in Brazil. It has exited restructuring last year and had $1.5 billion of cash on the balance sheet at the end of 2018 - more than enough dry powder to engage in a battle for the rigs that have a minimum bid value of $554 million, as per BEI. While Seadrill has plenty of debt, it has no amortization payments until 2020, and the first maturity comes in Q4 2022.
- Borr Drilling/Magni Partners have great access to capital, as proved by Borr's recent purchase of a jack-up with financing arranged at short notice. That said, owning two drillships and two semi-subs in Brazil does not look like a good fit into Borr's current jack-up strategy, so I'm not surprised that in BEI materials, Magni Partners was listed as the "surviving bidder" instead of Borr.
- Odfjell was set to participate in the original Sete Brazil, managing some units. However, it does not look like four Sete rigs are a good fit for Odfjell as the company is concentrated on the North Sea semi-sub segment. I believe Odfjell was listed in the BEI article simply because of the original link, and I highly doubt that serious negotiations took place.
- Transocean seems to be looking at everything that moves despite stretching its balance sheet after the acquisition of Ocean Rig. The company has recently got contracts for drillships Ocean Rig Corcovado and Ocean Rig Mykonos in Brazil, and also has drillship Petrobras 10000 working there. So, the move would have certainly be logical if not for the company's finances: Transocean does not have the money to unstack its cold-stacked modern drillships, so getting into yet another endeavor (with a guaranteed backlog but with the necessity to complete and mobilize the rigs) would have been a stretch on the balance sheet.
- Ensco is in process of merging with Rowan (RDC). Currently, Ensco has one semi-sub, Ensco 6002, drilling in Brazil. Rowan, which has a material fleet of jack-ups and whose drillships are in the Gulf of Mexico, does not have rigs in Brazil. I do not think that Ensco was a serious contender in this process.
- Keppel FELS - As per BEI, the yard wants only semi-subs Urca and Fraude which were built in Keppel FELS Brazil. A logical assumption is that the yard is confident of the quality of its Brazilian production and sees successful future for the rigs.
Another interesting news that I have recently found and that I haven't seen in offshore drilling discussions here on SA is that Petrobras plans to sell Vitoria 10000 - a drillship of a widespread Samsung 10000 design. As per BEI, the rig will require an investment of $50 million and will likely need a contract similar to Sete rigs to be successfully sold in the current market. This is not a good development for the major drillers that could have employed their own rigs and now will have to either buy Vitoria or see the rig being acquired by someone else.
Results of the Sete auction will be known soon. To me, it looks like Magni Partners has an upper hand since it is bidding for all four rigs and has good access to capital. Looking at the original story (29 rigs were planned for Sete Brazil!), the completion of just four units is a good outcome for the market. Hopefully, Brazil will finally turn the disappointing page in its offshore drilling history and start hiring an increased number of rigs again, providing opportunities for drilling companies across the world.
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