Sete Rigs Bids Are Revealed, Yard Values Semi-Subs Much Lower Than Borr Drilling's Shareholder

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Includes: BDRLF, ESV, ODJAF, PBR, RIG, SDRL
by: Vladimir Zernov
Summary

Finally, bids for Sete Brazil rigs are revealed.

Magni Partners outbid Keppel FELS by a wide margin.

The difference between the bids, one of which has been presented by a shipyard, is intriguing.

Magni's bid is way below the minimum value but I doubt that Sete's creditors have any other viable option.

Earlier this month, I have written about the very interesting process of selling four Sete Brazil rigs which are on contracts with Petrobras (PBR). New information is out, and it contains some very interesting numbers.

First, a quick reminder: Sete Brazil was a mega project to construct 29 rigs in Brazil. It turned out to be a failure, and only four rigs survived. They have received 10-year contracts at day rates of $299,000. The buyer will have to finish the construction of these rigs. The sale process is likely an ultimate attempt for creditors to get something out of the ~$5 billion that they have invested in Sete. It was originally speculated that possible bidders included Seadrill (SDRL), Borr Drilling (OTCPK:BDRLF), Odfjell (OTC:ODJAF), Transocean (RIG), and Ensco (ESV), but only Magni Partners, a shareholder in Borr Drilling, and Keppel FELS shipyard submitted their proposals.

Now we know what was in these proposals:

  1. Magni Partners: $250 million for all four rigs – drillships Arpoador, Deepsea Guarapari and semi-subs Frade, Urca. This proposal values each rig at $62.5 million per unit. Etesco will manage the rigs.
  2. Keppel FELS presented the offer of $50 million for two rigs - $35 million for Urca and $15 million for Frade.

Obviously, Magni Partners is a winner in this contest. However, the proposed amount is below the minimum value of $554 million, so the creditors will need to approve the deal.

I find it very interesting that Keppel FELS, whose Brazilian unit was building Frade and Urca, valued the rigs that low. As per this presentation from 2016, Urca has been completed 89.96% while Frade was completed 69.09%. It is logical to assume that the yard knows how much it will cost to bring the rigs into the fleet, so the difference between Magni Partners’ proposition and Keppel’s bid is startling (the above-mentioned presentation estimated Guarapari completion at 74.21% and Arpoador completion at 84.76%).

Etesco, the company proposed by Magni as the manager of the fleet, currently has only one drillship, Etesco Takatsugu J, working in Brazil for Petrobras since 2012. However, the company was part of the original Petrobras rig-building plan, so the choice looks logical.

While there’s always some degree of uncertainty until the actual deal is sealed, I believe that the creditors will have to approve the transaction because Magni’s offer looks like the best deal they can get. The big guys – Transocean, Ensco, post-restructuring Seadrill – apparently walked away from the deal, while Magni Partners looks like the only company with great access to capital as highlighted by Borr’s fleet accumulation success.

The other possible, but significantly less likely, outcome is that creditors refuse to sell the rigs at a value that represents less than half of the originally established threshold. In such a scenario, the rigs may end up in the scrapyard. Such an outcome would be great for big deepwater providers like Transocean and Ensco Rowan which have material spare capacity to employ. However, it’s hard to envision creditors walking away from money, even if the recovery is a tiny fraction of the original investment.

In my opinion, this story will soon come to an end. Greater certainty on the delivery timeline for these four rigs will facilitate planning for Petrobras and, hopefully, help the company to employ more rigs sooner – the ultra-deepwater market badly needs more jobs from Brazil.

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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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