VesselsValue: Good position vs bad position – Observations on the recent MODU market

By Charlie Hockless, Senior Offshore Analyst at VesselsValue

Since 2014 we’ve seen a significant decline in the oil price from 115 USD/bbl to 28 USD/bbl, with a recovery to around 50 USD/bbl (today’s price 53.86 USD/bbl). The collapse of oil pricing, reduced spend on exploration and production and the increased efficiencies in the drilling industry has led to a huge number of offshore vessels without work. This in turn has dramatically decreased asset values.

This has produced a mix of results in the industry: many companies are working hard to stay in the black with oil pricing at ~$40 per barrel and are looking to reduce costs by selling off unemployed vessels. On the other hand, many believe that the market is nearing the bottom and are starting to invest in offshore drilling assets.

Good Position

Borr Drilling

John Fredriksen’s former right hand man, Tor Olav Troim, is taking advantage of the presumed bottom of the market and has managed to raise heavy investment from capital markets and oil giant Schlumberger in December 2016. With this money, they have managed to remove their North Sea competitor Transocean. In March 2017, they bought all Transocean’s  jack-up rigs for $1.35 billion, which has kick started a lot of activity within the jack-up rig sector. Previously, most of the activity concerned a small volumes of resales or at auction sales with older assets, for example the 70s and 80s built jack-up rigs belonging to the now bankrupt Hercules.

Bad Position

Seadrill

The current market has been hurting John Fredriksen’s Seadrill, who is going to great lengths to keep their head above water after announcing earlier this year their intention to restructure. Today, Seadrill has a share price sitting at 0.58 dollars as opposed to a high of 46.93 in October 2013.

At the end of April 2017, Seadrill sold three jack-up rigs (West Triton, West Resolute, West Mischief for a total of $225 million) to Shelf Drilling as part of a push to raise capital. However, these rigs were valued at $415m therefore Seadrill recorded a loss of $190 million. Since the Borr drilling acquisitions, these Seadrill sales are a good price, even though the vessels are significantly older.

Ocean Rig – George Economou

Ocean Rig is in a very difficult place. Share price 0.22 USD vs a high June 2016 of 2.99. They are currently under bankruptcy protection to restructure 3.7 bn debt, therefore the future is looking rather poor for the listed company.

Ocean Rig are in a particularly difficult situation, as they have a lot of ultradeepwater mobile offshore drilling units; a sector which is suffering the most. These vessels represent the most expensive way for drilling for oil: the deeper offshore you go the more expensive it is. With the lower price of oil, which in turn produces reduced profit margins, there are cheaper areas on shore to drill for oil.

The reduced appetite for using ultradeepwater drilling units has had a huge impact on the asset prices of these vessels. Before the oil pricing downturn in July 2014, a 5 year old ultradeepwater vessel has a VV market value of 652 million USD. Today, the same 5 year old vessel is valued at 151 million USD, the lowest point since 2007.

Trend of the oil price, supply & demand in the future

OPEC have been making efforts to curb production by 1.8 million bbl/day in order to rebalance supply and demand. However, USA and Russia are outside of OPEC governance and have been producing more oil than ever before: USA is currently producing around 8mbbl/day while Russia is close to 11mbbl/day.

Furthermore, the growth of US shale is derailing OPEC efforts to curb supply. Roughly a quarter of the US daily production of oil is coming from the Permian Basin in West Texas. This basin has a unique geological make up, which makes shale oil production profitable even at c.$50 bbl. With Donald Trump being pro-oil, all types of production are going to be encouraged. Compared to ultradeepwater drilling, shale has become much more cost efficient.

Offshore Energy Today has shared the article above with permission from the author, a senior offshore analyst at VesselsValue.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Offshore Energy Today.