THE SEASON OF THE WHICH

The Season of the Which (company) is amongst us.

CA16901The forecasted and inevitable merger and acquisition season appears to be amongst us. We have already seen an increasing number of acquisitions of individual distressed rigs over the last year or so by the likes of Advanced Energy Systems, Arabdrill, Vantage, Ocean Rig and White Fleet Drilling, but company mergers have been dormant through the worst part of the downturn. But with green shoots of a recovery now evident, and with a host of distressed or restructured companies around, M&A activity is underway.

After Borr Drilling bought out Transocean’s jackup fleet plus a couple of distressed jackups from Hercules, Transocean turned around and is investing the money into Songa Offshore. This follows the earlier acquisition of Atwood Oceanics by Ensco. 

The Ensco / Atwood merger does has an impact in this region, providing Ensco with a strong presence in Australia where they have been a regularly occasional player since early 2000’s, often the half rig in a one and a half jackup market. They will now have a firm floater presence there. The Atwood jackup fleet, all modern premium rigs, will allow Ensco to phase out more of its older fleet, most likely their present five (5) cold stacked jackups. Ensco has already scrapped nine (9) of its jackup fleet and sold off at least four (4) others.

Transocean obviously have their sights on dominating the harsh environment floater market with their $3.4bn acquisition of Songa.  Songa have four (4) very modern semis all on long term charters with Statoil in Norway as well as three (3) 1970/1980 vintage mid water floaters that are currently idle and which Transocean will surely scrap, probably with a few more of its own elderly floaters. Until this happens Transocean will operate a fleet of fifty one (51) floaters, with thirty (30) UDW units (and four (4) more under construction), eleven (11) harsh environment floaters, three (3) deepwater floaters and seven (7) mid water floaters. The Songa acquisition also strengthens Transocean’s footprint in Norway.

With sixty (60) different drilling contractors operating floaters and one hundred and twenty (120) jackup drilling contractors around the world, there is a lot of scope for further M&A activity. Naturally the Ensco and Transocean deals have stimulated much speculation by analysts as to who is the next in line. Odfjell seems to be a common pick to be on Transocean’s radar but their roster of prime acquisition candidates includes Ocean Rig, Pacific Drilling, North Atlantic Drilling, Seadrill Partners and Seadrill itself, Maersk Drilling, Rowan and Noble. Maersk Drilling may have just leapt to the top of the list with Total having just acquired Maersk Oil, giving the impression that Maersk are exiting the oil and gas sector.

But who are the buyers? The analysts are suggesting Diamond, Rowan, Noble, Ensco, Seadrill (after restructuring), Borr Drilling as well as Transocean. One thing is for sure, no-one is going to buy out a company with a fleet of 1980’s vintage rigs unless they are mixed in with an attractive number of modern premium rigs. We certainly need consolidation, especially in the jackup market, but it is hard to envisage the number of contractors being reduced by very many when most of them operate thirty (30) year old rigs or older. But the jackup market, with near one hundred (100) stranded new builds yet to be cut lose into the market, is not going to improve until the old rigs are scrapped and this means many contractors will also have to fall away or invest in the new rigs and scrap the old.

However. the big boys are definitely preparing for an upswing in the market. There is no doubt the rig market is going to look very different a year from now. Meanwhile we are all guessing who is next.

 

 

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UNDERSTANDING “LOWER FOR EVEN LONGER” AT CHINESE SHIPYARDS.

Recent indications are that the Chinese shipyards have roused themselves from their inertia as the realities of a “lower for even longer” oil price hits home and that waiting out the downturn may not now be a viable option. The daily cost to the shipyards to maintain the seventy (70) odd drilling rigs they have either still under construction or which are completed and awaiting acceptance, plus payments on loans taken out to finance their construction, has to be crippling even with government support. They do seem still to be holding their line in that they will not sell them off at fire sale prices, but there are signs that after a couple of years of inactivity, in the true Chinese tradition of playing the long game, they are now making some early efforts to mitigate the situation. However, there have still not been any actual sales and very few deliveries.

Jackups

There are reports of interested buyers visiting China, who, given the prevailing low dayrates, require at least a 50% discount to make a purchase economically viable. But the yards, with their heads in the sand, have apparently not been prepared to offer anything more than a 10% discount on the original contractual value of their jackups. They are priced anywhere between $170-200 million. Egyptian based driller ADES is typical, having publicly announced its interest in acquiring distressed premium and new build units on a lease purchase basis but then stated categorically that this will only happen if they can get distressed prices.

Meanwhile CIMC, COSCO Dalian and CSSC have taken owners to arbitration, respectively with Coastal, Atlantica and ESSM, in the hope of salvaging something from cancelled contracts.

China Merchants have touted their jackups in the USA and Norway without much success but have now ratified a bare-boat agreement with Singapore’s I-Ships for two of their own speculative jackups and have already mobilized them to the Middle East where they are destined to work in Iran. I-Ships also have an understanding to potentially take four more units from CMIC, likely to be four (4) of the six (6) Bestford units. It is not known if these are lease-purchase agreements or just bare-boat charters but I-Ships are not asset owners. In any case the bare-boat rate is unlikely to be very enthralling given the prevailing jackup dayrates, especially in Iran with their famously tardy payments, but it does save on stacking costs. The shipyard, who have at least a dozen jackups to offload plus a couple of tender rigs, have also struck an agreement with Singapore based Energy Drilling to allow the latter to market tender rig MTR-3, rejected by Mermaid,  and jackup Bestford 5 with potential to operate the rigs, presumably on a bare-boat basis. Looks good on paper and on your marketing profile but the chances of Energy Drilling finding work for the rigs in a saturated market is highly unlikely especially for the jackup when the company has no experience of operating anything but tender rigs and is competing with the big boys with significant jackup operating experience.

CIMC Raffles appear to be considering taking a different path. After forming a subsidiary, Bluewhale Drilling, to operate the two Frigstad UDW semis which Frigstad sold back to the yard, it is strongly rumoured that Bluewhale might also incorporate stranded jackups Cerebus, Phoenix and Coastal JU2 together with harsh environment semis Beacon Atlantic, Beacon Pacific and North Dragon, into their fleet. Evidently, they are thinking international, as they have set up an office in Singapore.

The Shipyard Alliance formed last year between the seven foremost Chinese yards involved in drilling rig construction have proposed to the Chinese government that they press national drillers COSL and Sinopec to replace their aging jackups with their unwanted newbuilds. However, this was estimated to cost $6.4bn to replace some fifty-six (56) drilling rigs that are over twenty (20) years old and COSL, barely able to break even at present, understandably refused, as did Sinopec.

There have been a slew of cancellations this year as owners terminated their construction agreements and more are inevitable. Since January CIMC Raffles have lost the contracts for jackups Cerebus, Phoenix and Coastal JU2, the latter now in arbitration; China Merchants had tender rigs MTR-3 and MTR-4 cancelled; CSIC Shanghaiguan had three of the four Falcon jackups terminated (three of TS Coral, TS Opal, TS Jade and TS Emerald) and Yangzjiang admitted that it was unlikely that MENA would take delivery of jackup Explorer 1 thus were looking for buyers. CPLEC jackup Paragard 200 was sold to Iranian buyers in 2013 but remained in the shipyard until now and CPLEC have just announced the transaction has fallen through, some four years later.

And more agreements have been reached with some owners to further delay deliveries. Dynamic Drilling have pushed back delivery of jackup Dynamic Momentum at COSCO Dalian until March 2018, KS Drilling delayed its F&G JU2000E jackup at ZPMC until end 2018 and the KS Orient Star II by two years until December 2019, Northern Offshore have delayed all six of their under construction jackups at COSCO and SWS into 2018, Energy Drilling pushed delivery of semi-tender EDrill-3 to Q4 this year at COSCO who also had the delivery of UDW semi Sevan Developer pushed back once again this time to June 2020. Seadrill, who have twelve (12) rigs under construction in China and South Korea, keep maintaining they are not obligated to accept their rigs and keep pushing back delivery dates. It is noticeable that these owners are all bone fide drilling contractors who are likely to accept delivery of their rigs at some point in the future and are probably making judicious use of the threat to cancel the contracts to get deliveries delayed until the market improves. However, this is really just the tip of the iceberg when you consider that there are over forty (40) speculative jackups whose owners are not drillers and have been noticeable only by their silence. They have no intention of coughing up the 90% final payment needed to take delivery of an asset that they cannot offload. In many cases the shipyards have offered to try to find buyers on behalf of the owners to stave off cancellations but with little or no success.

Of course, Singapore and South Korea are not immune from such issues. This year has seen Fred Olsen terminate an UDW contract at Hyundai and Stena cancel a harsh environment semi at Samsung who are also involved in arbitration with Pacific over the cancellation of an UDW drillship as well as having to accept further delays to the delivery dates of two Seadrill drillships.

Over in Singapore, KeppelFELS have not yet experienced any cancellations but have had to agree to postponing deliveries on jackups Hakuryu 15, Paraiso II, TS Topaz, three Fecon units and Clearwater’s jackup. At least any uncertainty over delivery of the five (5) Transocean jackups was alleviated when Borr Drilling purchased them, in the process agreeing on new delivery dates for which they have paid a premium. Sembcorp have not done quite as well; an arbitration case ongoing with Marco Polo, further delays on UDW semi West Rigel and the jackup Hakuryu 14 plus continuing uncertainty over the future of three Oro Negro and two Perisai jackups.

In summary, the problem is still a serious one especially for the Chinese shipyards, but there are baby steps taking place to try to alleviate the situation. Just that it could take a lot of steps.

Piano Player in a Whorehouse

keepcalm

The final part of my offshore story, Part Eight, Back to Indonesia, has been added. See the Piano Player Tab and scroll down.

Also added under a new Tab, “Oilfield Golf” are my experiences playing in the oil patch golf circuit around South East Asia. Apologies to anyone offended.

MID WATER FLOATERS – ARE THEY A DYING BREED?

The plight ofsedco700 the mid water floater fleet has tended fly beneath the radar with most focus being more on the trials of the Ultra-deepwater sector and the over-supply of the jackup fleet.

But the number of active moored floaters, designed to operate in shallow and mid water, is becoming dangerously low.  Out of a fleet strength a couple of years ago of one hundred and thirty-two (132) mid water floater (up to 5,000 ft water depth capable) fifty (50) or 38% of the fleet have already been scrapped which leaves an nominal “active” fleet of eighty-two (82) units.

“Active” is a little bit of a misnomer as of these eighty-two (82) rigs, twenty-two (22) are cold stacked and another twenty-three (23) are purported to be “warm stacked” which leaves us a contracted fleet strength of only thirty-seven (37) units that are currently active. Of these thirty-seven (37) floaters, twenty-three (23) or 62% were built in the 1970’s and 1980’s.

Most observers will agree that any cold stacked rig, especially if built 30 years ago or more, is unlikely to work again. All but two (2) of the cold stacked units are over thirty years of age, the exceptions being two Opus Tiger drillships whose future as operational rigs is far from certain following the bankruptcy of Opus Offshore. Similarly, sixteen (16) of the twenty-three (23) warm stacked rigs also date from the 1970’s and 1980’s.

Thus, out of eighty-two (82) rigs still in the world’s fleet there are sixty (60) that have passed 30 years of service and technically are due to be scrapped. Assuming the downturn does in fact continue for several more years it is highly likely that most of these venerable rigs will indeed be scrapped and that would leave less than twenty-five (25) mid water rated floaters plus five (5) that are under construction and will get delivered at some point. Most of these are harsh environment rigs built for the North Sea.

If this comes to pass who is going to fill in to drill in benign shallow and in mid water depths? The world’s thirty-six (36) rig strong deepwater fleet (over 5,000 ft to 7,499 ft) is not going to help much as seventeen (17) of them have already been scrapped leaving only eighteen (18) of which seven (7) are cold stacked and one (1) warm stacked. This leaves just ten (10) active units. Of the eighteen (18) there are eleven (11) or 61% that are in the senior citizen class. Applying the same hypothesis as for the mid water units there might only be seven (7) deepwater rigs left after a potential culling of aged units. All but one (1) of these are dynamically positioned (DP) which restricts operations in shallow waters, generally acknowledged (but debated) to be below 1,000 ft. The shallower it gets the smaller the watch circle which is a function of the riser flex joint angle limits.

So, are we potentially looking at a severe shortage of moored floaters capable of working in shallow to mid water areas just out of reach of the longer legged jackup but not within the reach of the DP floaters? We have already seen the incursion of ultra-deepwater rigs into territory nominally expected to be the preserve of deepwater rigs thus displacing the deepwater units who in turn have moved down a notch to water depths under 5,000 ft. But as almost all are DP units, which cannot take on the really shallow water work, and there is still expected to be a significant demand, eventually, for moored rigs capable of working in depths under 1,000 ft. Will we therefore see a mini boom in the construction of low cost moored semi-subs or is it to be extra- long legged jackups that will be built to cover a perceived under supply for this sector? It is more likely we will see more conversions from DP mooring to hybrid DP/moored mooring systems especially for the semis and there have indeed been several such conversions recently, Ensco having made at least two. More likely of course is that we will see contractors struggling to keep their antiquated floaters in Class for as long as they can and as long as day rates make it economic, but twenty-one of the “active” fleet are already over forty (40) years old with another thirty (30) odd reaching that milestone in the next couple of years. Does life really begin at 40?

Green Shoots or a False Dawn? The SEA Jackup market Q1 2017.

Has the jackup market in the Asia Pacific recovered to an extent? Based on the number on contracts aStacked jackupswarded this year so far it would indicate a significant improvement on 2016.

There were twenty-one (21) contracts awarded to jackups in 2016 for work in the Asia Pacific region. In the first four (4) months of 2017 there have already been twenty-three (23) awards.

To add to these there are currently twelve (12) tenders in play, three (3) further pre-qualifications and twelve (12) active EOI’s/Market Surveys detailing future requirements although only three (3) of these commence in 2017.

The breakdown is:

  Malaysia Indonesia PNG Australia Brunei Vietnam
Tenders 4 4 1 1 1 1
Pre-Quals 2     1    
EOI’s/Surveys 6 3   1   2
Total 12 7 1 3 1 3

So Malaysia would seem to have awoken from its slumbers. The number of requirements has now exceeded the number of domestic owned rigs which will prevent Petronas from exercising its Malaysia only policy and open up the country to international and regional drillers. This is borne out by the most recent Petronas Carigali tender, open to all, as well as the charter won recently by Ensco for its jackup Ensco 106 with Sapura Energy.  Malaysian contractor UMW is expected to have 100% utilization once the outstanding tenders are awarded and the other Malaysian contractor, Perisai, is so encouraged by the prospect of a brighter future that it is crewing up to take delivery of its second new build BMC 400 jackup from PPL shipyard, confident it will find work for it.

However closer examination of the work schedules show that out of the twelve (12) projects only four (4) are long term (minimum 1 year) and three (3) of these do not start until 2018. The remainder will be completed before the end of this year as will the firm contracts of six (6) of the current eight (8) charters ongoing in Malaysia. Of course, some new requirements may emerge for work starting this year but we are already into May so there is unlikely to be many. Even assuming all the current requirements for a 2017 commencement are duly awarded and proceed as planned, most will have finished before the end of the year, which as visible at present would reduce the number of working jackups in Malaysia at the end of the year to either six (6) or seven (7), less than at present.

Meanwhile Vietnam has been the busiest over the last two years but nearly all projects have been very short term. Of the sixteen (16) fixtures awarded over the last two years eleven (11) have kept domestic driller PV Drilling in better shape than other contractors in the region, but although PVD have been first to achieve a 100% fleet utilization recently, all four (4) of their jackup fleet will have completed their charters by October this year, and with only three (3) single well prospects in Vietnam emerging for the rest of this year it will likely spearhead another push to find more work outside of Vietnam.

Then there is Indonesia. Indonesia is Indonesia and impossible to predict. The only sure thing is that the bureaucracy will more than likely prevent the majority of the proposed 2017 commencements from actually starting this year. The Cabotage issue alone causes bids and even re-bids to fail given that there are too few Indonesian flagged units available and the “pick a number” method of arriving at a local content percentage requirement is unsettling when it yo-yo’s between 30% and 50% and any number in between.

Work around the rest of the region is nothing to write home about, in fact it is fairly desultory with just five (5) requirements for this and for next year so far although more work for 2018 will emerge in time. Much of the work over the last two years has been workovers or plug and abandonment projects as operators have taken advantage of low rig rates for well maintenance work. Exploration work is virtually non-existant.

But the numbers do not lie, it is indisputable that there are already more charters in the first four months of the year than in the whole of last year and it is certainly keeping domestic drillers in business. However, given the short term natures of much of this year’s forthcoming requirements and of completion dates of current contracts already underway, the utilization numbers at the end of the year are not going to be much different from those at the tail end of last year. “Hot” rigs that have been working during the last two years will continue to win work whereas the vast majority of the twenty (20) jackups that have been warm stacked in the region for some time now will not find work this year to come easily.

The new dawn has been postponed, roll on 2018.

The Norwegians are back

The recent downloadBorr Drilling/Transocean jackup deal, the formation of Northern Drilling Ltd and the purchase of the West Mira by SeaTankers heralds the return of the Norwegians into the rig market who, as they have done successfully before, have judged that now is the time to enter the market and scoop up distressed rigs. The emphasis does seems to be on acquiring individual units rather than whole companies, but then most of those are saddled with a lot of debt, non more so than Seadrill.

Now speculation mounts on what are the targets for Northern Drilling, said to be one of Fredriksen’s special purpose vehicles. Abandoned units such as Cobalt Explorer, Bollsta Dolphin, Pacific Zonda, West Rigel, Beacon Pacific, Beacon Atlantic and North Dragon could well be on their shopping list. Of course Borr Drilling, christened a Seadrill clone, may also compete with their former boss for these assets which could lead to an interesting situation.

But how does Borr Drilling’s acquisition of Transocean’s jackup fleet affect South east Asia? Transocean have three premium rigs working for Chevron in Thailand. It has been a long held belief amongst regionally based drillers trying to break into Chevron in Thailand that Chevron have an understanding with Transocean – a sort of frame agreement – to use only Transocean jackups. This has been challenged recently of course by the emergence of Shelf Drilling but then they are ex-Transocean, both the iron and the people. Shelf managed to get two excellent contracts for two new builds with Chevron which is the first time for over ten years that another drilling contractor has broken the hegemony held by Transocean – although you could argue that it was just Transocean-Light.

So where will Borr Drilling fit into this cozy relationship with Chevron? One of the three rigs, Transocean Andaman, completes its charter in July, currently with no follow up work. The other two run through to March and October 2018. Borr will have some sweet talking to do to convince Chevron to continue the relationship when you have Shelf waiting in the wings eager to expand their presence. Shelf’s problem though is that they do not have any suitable jackups to offer at present.

Borr have also acquired the five KFELS Super B jackups ordered by Transocean and still under construction in Singapore, with the first three said to be 80% completed and the last two around 20%. Borr have made a commitment, expressed through a down payment of $275m, and doubtless to Keppel’s immense relief, to take delivery of the first three and brought forward their delivery dates to this year and 2018 after Transocean had pushed them back into 2020 and 2021. There is still a danger, from Keppel’s perspective that Borr may not take delivery of the last two units but it is likely that their yard costs  to date for those two rigs have been met by the 20% down payments made by Transocean at the time the rigs were ordered. Bringing forward the delivery dates of the three under construction rigs is a bit of a surprise considering by the end of the year, pending any new contracts achieved in the meantime, they will have only two rigs on contract, five cold stacked and six warm stacked including one of the new builds and the two Hercules acquisitions. Despite this far from promising outlook with the market adjudged to be far from recovery, Borr’s stock price has soared. The Norwegians are back.

RESTRICTIVE PRACTICES

A year ago I wrote a blog suggesting South East Asia was becoming a no-go zone for International jackup contractors. One year on the reality is that, apart from Australia, Myanmar and Thailand, none of whom have abounding opportunities for jackups, this has become a truism.

contract-awardsOut of 41 jackups contract awards
made throughout the region since January 2016 fully 68% have gone to domestic/indigenous drilling contractors, another 15% to what I term “regional” contractors (COSL, Japan Drilling, Aban etc.) and only 17% have gone to “international” drillers such as Ensco, Seadrill, Atwood, Vantage etc., mostly in Thailand and Australia.

Malaysia leads the way in making no pretense that they are supporting their domestic drillers to the exclusion of all others. Operators in Malaysia are instructed to limit tender participation to local drilling contractors only, which is just UMW and Perisai, the latter only having one jackup to offer. Thus UMW have scooped up six (6) of the ten (10) awards made in 2016 and this year. The venerable international exception has been Seadrill but this was a legacy award for the West Vigilant for an early terminated prior contract from Repsol. Repsol’s latest requirement, for two jackups for a year’s work each, is only open to Malaysian contractors, although one of the requirements, located on the Malaysian-Vietnam border, is open to Vietnam’s PV Drilling, in this case masquerading as a regional contractor. This lack of any real competition and the intent by Petronas to support its domestic industry has led to UMW enjoying dayrates significantly above the regional average. With UMW likely to have all their seven (7) rigs contracted this year Petronas is likely to have to rescind its directive not to allow foreign rigs to participate if its demand increases beyond the domestic supply of eight (8) rigs. This presupposes that Perisai do not find the funds needed for them to finally take delivery of their two new build jackups languishing at PPL shipyard awaiting acceptance and final payment.

In Vietnam there have been thirteen (13) contract awards during this period, all but two (2) made to indigenous contractor PV Drilling. The exceptions were to a regional driller, Japan Drilling, because the operator required an extra-long legged unit which PVD did not have. The other was for a Russian owned rig which was picked up by the Russian-Vietnamese joint venture Vietsovpetro. In actual fact the contract for the long legged jackup was believed to have been initially awarded to PV Drilling who then sub-contracted Japan Drilling to fulfill the contract.

Indonesia supports its local industry in a different way by making it extremely difficult for a non-Indonesian entity to win any contract awards due to its Cabotage stipulation and the high local content requirements but somehow regional contractor COSL have managed some successes, winning three (3) awards in the last year, albeit with operators who have Chinese equity. Local driller Apexindo have garnered 53% of all awards made with the only international contractor to feature being Ensco who slipped in the Ensco 67 during the administrative confusion surrounding Cabotage implementation early in 2016 and also scooped up the BP long term charter where complex contractual and technical demands had ruled out the domestic competition. The Cabotage regulations do have a contingency to allow in foreign flagged units if no domestic rigs are available. However apart from Apexindo the other Indonesian entities, KS Drilling and Harmoni Drilling also have Indonesian flagged units but for different reasons have failed to win any charters so far. It has been noticeable that there has been a distinct lack of effort and enthusiasm amongst the international contractors to participate in Indonesian tenders over the last year.

Thailand practices a different kind of constraint on who can work in the Kingdom. There is no regulatory requirements from the government and it is left to the operators themselves to determine how and who they invite to tender. Drilling conditions in the Gulf of Thailand are very different from elsewhere in the region and all Thai based operators insist that any contracted party have prior experience of drilling in the country. This effectively restricts participants to Transocean, Shelf, Ensco, Atwood, Vantage and Seadrill with the latter three duly sharing out the three contracts awarded during the last year.

Other regional fixtures have been limited to one in Myanmar and one in Australia. PV Drilling stole a march on its international competition by low balling their offer to Total for the only jackup fixture made in Myanmar during 2016 and Ensco picked up a six (6) month charter plus options with Chevron in Australia. Neither country has a domestic driller thus no embargo on who can tender but Australia’s stringent Safety Case requirements tends to limit participation to the major jackup drilling companies such as Ensco, Seadrill, Noble and Atwood, the latter having long associations working in Australia in the floater market. Quadrant and PTTEP are tendering for a jackup at present and there are several other prospects for work in 2017 and 2018 and it would be a surprise if these were awarded to any contractor other than those listed above.

There is one other country in the region currently employing jackups and currently are out in the market for several more, Brunei. There are no regulatory restrictions there and this was evident in the current tender issued by Shell to which up to fourteen contractors were said to have responded offering over twenty jackups.

In summary lack of prospects for the international drillers have led to a slow trickle of rig departures from the region, eleven (11) jackups having relocated since the beginning of 2016 with Rowan and Paragon having exited the region altogether. Despite this the number of marketed jackups owned by international contractors still outnumber the domestic owned units with twenty-four (24) international versus eighteen (18) indigenous plus nine (9) regional units in the region’s fleet. With only eleven (11) of the international units currently working, seven (7) of which come off contract this year, it could be a long wait for the remaining thirteen (13) stacked units to find work in this region.