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Bassoe Cuts Deepwater Rig Values By 20% - Implications For Drillers' Stocks

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Includes: AWLCF, BORR, DO, NE, PACD, RIG, SDLP, SDRL, VAL
by: Vladimir Zernov
Summary

Bassoe Offshore cuts deepwater rig estimates by as much as 20%.

Jack-ups and harsh-environment semi-subs also suffer valuation corrections, but their size is much smaller.

This time, the market clearly ran ahead of analysts and performed a valuation correction by sending drillers' shares to multi-year lows.

Investors and traders who are interested in offshore drilling stocks have grown accustomed to using the Bassoe Offshore database - a great tool for getting the latest news and asset values. While the asset values provided by Bassoe have been actively debated here on Seeking Alpha, I believe that they provide the best approximation for the challenging landscape of the modern offshore drilling industry. Even if one disagrees with the exact value estimate for a certain rig, the trend of value estimate changes is still an invaluable tool which shows where the market is heading - at least when value estimates are changed by a material amount.

This is exactly what has just happened. Bassoe has cut estimates across the board. Non-harsh ultra-deepwater floating rig asset values were slashed by 20% on average (!), jack-up values got cut by 3-10%, while harsh-environment semi-sub values were decreased by 3-5%. Here’s the reasoning for the move provided by Bassoe Offshore:

Due to several factors including lack of liquidity (transaction activity), less willingness by investors and banks to finance rig acquisitions, expectations of a prolonged low-dayrate environment, and additional distressed or available supply in the market, offshore rig values have decreased across all segments”.

Ultra-deepwater drillships and semi-subs

The decision to reprice the ultra-deepwater floaters came after recent cancellations by Transocean (RIG) (I wrote about it here) and Northern Drilling (I wrote about it here). If companies cancel the delivery of the top-tier rigs which had attractive delivery and financing terms, then the market is unwilling to commit financing to the best rigs, and the value of the whole fleet should be corrected to the downside. This makes perfect sense, since the ultra-deepwater rig valuation is based more on transactions than on their cash flow production ability right now, as the dayrates are too low. The absence of transactions signals the absence of buyers at current prices.

In my recent article titled “Failed M&A: Lessons From Transocean And Valaris”, I argued that both Transocean and Valaris (VAL) jumped the gun by buying ultra-deepwater assets at a time when they had many unemployed rigs in a wild bet on a fast recovery. The update in asset values provides another chance to look at the boldest bet made during the current downturn: Transocean’s purchase of Ocean Rig. At the time of the purchase, Transocean widely marketed that it paid $278 million for a “core” floater, a group of eight Ocean Rig drillships, half of which was (and still is) cold-stacked at the time of the deal.

Here are their current valuation estimates: Deepwater Corcovado ($178-197 million), Deepwater Mykonos ($189-209 million), Deepwater Orion ($175-193 million), Deepwater Skyros ($219-242 million), Ocean Rig Apollo ($183-202 million), Ocean Rig Athena ($182-201 million), Ocean Rig Mylos ($178-196 million), Ocean Rig Olympia ($144-160 million). The numbers speak for themselves in this case.

One can argue that these theoretical valuation estimates (there are no transactions to prove them at this point of time) do not have a major impact on the companies’ business, but they do. The whole industry has a debt problem, and it will have to refinance some debt at the beginning of the next decade or it will head to mass restructurings sometime closer to 2023. Obviously, the creditors will not look at the balance sheet numbers but rather at valuation estimates like those provided by Bassoe to determine whether they are comfortable with lending money to the industry or not.

So, the decrease of rig value estimates negatively impacts all companies with drillships and semi-subs in their fleet: Transocean, Valaris, Noble Corp. (NE), Diamond Offshore (DO), Seadrill (SDRL), Seadrill Partners (former SDLP, now trades on the OTC as SDLPF while the company appeals the delisting ruling), Pacific Drilling (PACD). However, I’d note that the stock market was “faster” than analysts this time, as it has already sent most drillers’ stocks to multi-year lows.

Jack-ups

As per Bassoe, the jack-up values are hit by sales of distressed assets by creditors of Oro Negro, Aban Offshore and Dynamic Drilling. My bet is that top-tier rigs will not be hurt much by this downside move, since the jack-up market fundamentals are constantly improving. Leading jack-up market players like Noble Corp., Valaris or Borr Drilling (BORR) should not get hurt much from this side.

Ultra-harsh environment semi-subs

The most interesting play in this segment is Awilco Drilling (OTCPK:AWLCF), which ordered two rigs with delivery in 2021 and 2022. At this point, I see no indications of any negative tendencies on the harsh-environment front. In my opinion, the slight decrease in valuations made by Bassoe was due to general investor sentiment towards offshore drilling rather than by any negative fundamental developments in the harsh-environment market segment.

Conclusion

The decrease in rig valuations is sad but not surprising news for anyone who follows the industry. I believe that the near-term impact on the offshore drilling stocks will be limited, as they have just suffered material downside. My main concern is regarding the cold-stacked assets - reactivation costs increase with each year without work, and the current asset valuations may be too optimistic for this group of assets even after the cut.

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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.

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