Another Newbuild Drillship Finds Its Owner

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Includes: DO, ESV, NE, PACD, RIG, SDLP, SDRL
by: Vladimir Zernov
Summary

Northern Drilling buys drillship Cobalt Explorer.

The price is $350 million, but it includes spare parts including two blowout preventers valued at $25 million each.

The deal supports current estimates for top-tier drillship valuation.

Many newbuild drillships have already found their owners. The supply situation on the drillship side remains a major concern for near-term dayrate upside.

Interesting news appeared while traders and investors were discussing a flurry of news from Transocean (RIG), Diamond Offshore (DO) and EnscoRowan (ESV). Northern Drilling, whose rigs are managed by Seadrill (SDRL), announced that it had exercised the option to purchase drillship Cobalt Explorer from Daewoo Shipbuilding & Marine Engineering (DSME).

The company is paying $350 million split as follows:

  1. $12 million paid in December 2018;
  2. $93 million will be paid in five payments of $18.6 million over 10 months, starting June 2019; and
  3. $245 million will be paid at delivery.

While the existence of this option was long-known, the actual deal provides the latest data point on drillship values, which is important for all companies with drillships in their fleet, including the above-mentioned drillers as well as Noble Corp. (NE), Pacific Drilling (PACD), Seadrill Partners (SDLP).

As per Bassoe Offshore database, the most expensive drillship right now is the warm stacked Sonangol Libongos which is managed by Seadrill. The rig's value is estimated at $304-336 million. Please note that Bassoe database does not provide values for newbuild drillships that have not yet been delivered. Obviously, the crown will be taken by Transocean's Deepwater Titan when it is delivered in 2021 as the rig's construction will cost more than $1 billion (I discussed this in the article on Transocean to which I linked above).

While expensive in construction, Cobalt Explorer looks cheap in comparison with Deepwater Titan - the previous owner's estimated total project cost was "just" $660 million. What is even more important, the rig comes with additional spare parts including two blowout preventors whose cost is estimated at $25 million each. Thus, the value of the rig without spare parts should be somewhere around $300 million.

Cobalt Explorer is a drillship of DSME 12000 design. Other holders of such rigs are Transocean (Deepwater Poseidon, Deepwater Pontus, Deepwater Conqueror, Deepwater Proteus, Deepwater Thalassa, Deepwater Invictus, Deepwater Asgard), EnscoRowan (Ensco DS-11, Ensco DS-12, and newbuilds Ensco DS-13, Ensco DS-14), Vantage Drilling (Tungsten Explorer), Seadrill's joint venture with Sonangol (Sonangol Libongos, newbuild Sonangol Quenguela) and Northern Drilling (newbuilds Cobalt Explorer, West Aquila and West Libra). Bassoe's valuation estimates for top Transocean rigs are about $300-330 million, so Northern Drilling is getting a fair deal which confirms the validity of valuation estimates for top-tier rigs.

Source: Bassoe Offshore

As shown in the picture above, there are still some newbuild drillships waiting for their owners in case some company wants to increase its fleet and has the means to do so. Samsung Heavy Industries may offer Pacific Zonda, West Dorado and West Draco, while Keppel FELS has KFELS Can Do DS. Also, Dolphin Drilling may soon be offering Bolette Dolphin.

There are several conclusions from this data. First, it's clear that the train has not left the station for those who want to add a newbuild drillship or two to their fleet. Second, a significant number of newbuilds have already found their owners like Transocean, EnscoRowan, Northern Drilling, Sonangol-Seadrill - these rigs will be ultimately coming to the market. The third conclusion, which comes directly out of the second one, is that Diamond Offshore's management team is right when speaking about the continuous supply problem in the drillship fleet - there are plenty of newbuilds and warm stacked rigs, and even some cold stacked ones will try to return back into the active fleet.

The stock market has recently been very hard to offshore drilling stocks, finally opening its eyes to the fact that the recovery won't happen overnight, and that dayrates will have to go a potentially long and challenging road before reaching more acceptable levels. However, the stock market is almost always too optimistic during upside, and too pessimistic during downside, so the current sell-off will definitely open speculative opportunities. Speaking about a possible short-term trade, buying a basket of leading drillers (Transocean, EnscoRowan, Diamond Offshore, Seadrill, Noble Corp.) once the current downside momentum stops makes sense as a speculation on the general rebound in offshore drilling shares.

Speaking about longer-term perspectives and picking up a certain driller, Diamond Offshore remains my favorite due to solid balance sheet, good contract coverage and solid execution by the management team. EnscoRowan, which has become stronger after the merger with Rowan, offers are more aggressive bet on the recovery. That said, I maintain my stance that this group of stocks is likely to provide better returns for traders who trade in and out and capture the wild swings rather than investors who can be stuck in their positions for several years before they know the final outcome - whether the industry can survive with the current capital structure or not.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DO, ESV over 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.

Additional disclosure: I may trade any of the above-mentioned stocks.