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Transocean (RIG) has just announced its decision to retire four rigs: Deepwater Discovery, Deepwater Frontier, Deepwater Millennium, and Songa Trym. The company expects that its second-quarter results will include a non-cash charge of approximately $520 million due to this decision. Transocean added that as the company continued to evaluate the long-term competitiveness of the fleet, additional rigs could be identified as candidates for retirement. Let’s look at this decision in more detail.
Deepwater Discovery
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Deepwater Discovery is a drillship built in 2000 that was stacked since March 2015 of Samsung/Reading & Bates design. The rig was not competitive in the modern environment dominated by newbuild drillships. My view is that the company waited before retiring Deepwater Discovery to reduce the shock on the balance sheet. While write-offs are non-cash, they have an impact on investor psychology and covenants if any. Now is a good time to pour some cold water on market participants as Brent oil (BNO) stays firmly in the $75-80 range and Transocean’s shares are performing reasonably well, up 16% year-to-date.
Deepwater Frontier
Deepwater Frontier is a drillship built in 1999 and stacked since November 2015. This is also a rig of Samsung/Reading & Bates design. Just like Deepwater Discovery, the rig was uncompetitive in the modern environment.
Deepwater Millennium
Deepwater Millennium is a drillship built in 1999 and stacked since May 2016. This is a rig of Samsung/Reading & Bates design. Just like the two previously mentioned rigs, Deepwater Millennium had zero chances to find a job in the current environment and the only reason that kept Transocean from retiring the rig was the accounting consequences of such a move.
I’d like to remind that these drillships will not be the last step in “cleaning†of Transocean’s drillship segment. At the very least, the company has four more retirement candidates in the drillship segment – Discoverer Deep Seas (2001), Discoverer Enterprise (1999), Discoverer Spirit (2000) and GSF C.R. Luigs (2000). These rigs have no chance of being employed and will ultimately be scrapped.
Songa Trym
Songa Trym is a semi-submersible built in 1976. The rig was acquired as part of the transaction with Songa Offshore, which was de-facto a purchase of Songa’s backlog and the future contract potential of the four Songa’s Cat-D rigs. Songa also had three older rigs – Songa Trym, Songa Delta and Songa Dee, all of which were cold stacked. I see a very significant possibility that the remaining older Songa rigs will also be retired in the future.
The retirement of the four rigs is not a surprise to anyone who follows the industry. These rigs had to go; there was no other way. As I mentioned a number of times in my previous articles on Transocean, the only obstacle was the accounting consequences of such a move.
From time to time, I see someone pointing at book value of drillers in the comment section of offshore drilling articles. Don’t do this; book value has no sense unless you deal with fresh start accounting like in the case of Ocean Rig (ORIG). Transocean’s write-off shows one more time how inflated the book values are for offshore drillers. Actual fleet values like the ones you can easily reference through Bassoe Offshore database are much more representative of the real situation.
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I’d like to mention another topic on which I was thinking in recent months. As we see, technology advancements together with rig overproduction made drillships built in 2000 look like antique machinery. Yet, such machines are anticipated to stay operative for 30+ years by design. For Deepwater Discovery, Deepwater Frontier and Deepwater Millennium, the useful life was about 15 years. Today, we have a number of modern drillships built after 2010 in cold stacked mode, most notably Ocean Rig’s drillships. Given the current contracting dynamics, rig supply situation and the cost of bringing these rigs back to work, they will not return to workforce in this decade.
More realistically, their return (if it ever happens) should be in the 2020-2022 time frame – and if you are conservative, 2022 looks more realistic than 2020. By that time, some of these rigs would have already celebrated their 10th birthday. How much useful life will they have left at that time? This question is very important because currently the market assigns decent value for such rigs. Say, Ocean Rig Olympia (2011) is valued at $167-184 million by Bassoe Offshore. Is this value real? Can’t it be that continuous technology improvements will make these rigs obsolete just like they made obsolete Transocean’s rigs of the millennium era? For me, this is still an open question and I have not yet arrived at a definite answer for myself but I wanted to share my concerns with you.
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Sure, a $520 million write-off can never be a good catalyst for a stock. However, I do not anticipate any major action in Transocean’s shares unless there’s a big move in oil prices. Currently, the market is very focused on the future. What we see now is that higher oil prices have improved market sentiment a bit, but hard contract data shows that it’s too early to party and call a true recovery for any segment other than the North Sea. My opinion is that the upside in Transocean’s shares needs either more actual supportive data or further upside in oil prices to be continued. Otherwise, the shares may just settle in some wide see-saw range for the summer months.
Valaris Limited announced new contracts awarded subsequent to issuing the Company’s most recent fleet status report on February 21, 2023. Three-year contract with Petrobras for drillship VALARIS DS-8. The rig will be reactivated for this contract. The total contract value is approximately $500 million, including a $30 million mobilization fee. 100-day contract with a TotalEnergies affiliate for drillship VALARIS DS-12. The contract is expected to commence in second quarter 2023. 70-day contract with Beach Energy offshore New Zealand for heavy duty modern jackup VALARIS 107. The contract is expected to commence in third quarter 2023. The total contract value is approximately $26 million. President and Chief Executive Officer Anton Dibowitz said, “We are particularly pleased to have secured the award for preservation stacked drillship VALARIS DS-8, for a contract that is expected to generate a meaningful return over the firm contract term, and we remain focused on exercising our operational leverage in a disciplined manner. This most recent award represents the sixth contract awarded to one of our high-quality stacked floaters since mid-2021, and speaks volumes about our demonstrated track record of project execution when reactivating rigs.” Dibowitz added, “Following the reactivation of VALARIS DS-17 and DS-8, we will have ten floaters working across the golden triangle, including four drillships in Brazil, a market where we expect to see continued growth over the next several years.” Updated Guidance As a result of the contract awarded to VALARIS DS-8, which will require the rig to be reactivated from preservation stack, we are updating our first quarter 2023 and full-year 2023 guidance provided on our fourth quarter 2022 conference call on February 21, 2023. First Quarter 2023 Contract drilling expense is expected to increase by approximately $5 million to $385 million to $395 million. Adjusted EBITDA is expected to decrease by approximately $5 million to negative $5 million to breakeven. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $25 million to $30 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Full-Year 2023 Revenues are anticipated to be $1.8 billion to $1.9 billion, unchanged from the guidance provided on our fourth quarter 2022 conference call. Contract drilling expense is expected to increase by approximately $60 million to $1.49 billion to $1.59 billion. Adjusted EBITDA is expected to decrease by approximately $60 million to $180 million to $220 million. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $280 million to $320 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Capital expenditures are expected to increase by $60 million to $320 million to $360 million. Source: Valaris Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Seadrill Limited announced that the West Neptune has executed approximately six months of term extensions with LLOG Exploration Offshore, L.L.C in the US Gulf of Mexico. The extensions will commence in direct continuation of the existing term, and will keep the rig busy until Q3 2024, furthering Seadrill and LLOG’s long-term association. Total contract value for the extension is approximately $79 million. Source: Seadrill Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Semisub rig owner Dolphin Drilling has inked a new contract with Peak Petroleum in Nigeria for its 1974-built Blackford Dolphin. The firm contract, which follows the letter of award in January, gives the Euronext Growth-listed owner of three rigs the potential to extend the unit’s backlog by a minimum of 120 days and up to 485 days. The deal adds to and will be a direct continuation of the previously announced 12-month contract with General Hydrocarbon Limited (GHL). Øystein Stray Spetalen-backed company said the effective dayrate associated with the minimum firm period of the contract is $325,000, including the mobilisation fee. “The final award of the contract for Blackford Dolphin shows the opportunities in Nigeria at a strong dayrate, in addition to building on the backlog for the rig. It also underlines the attractiveness of our assets, and we look forward to returning to revenue-generating operations in 2023,” noted Bjørnar Iversen, CEO of Dolphin Drilling. Source: Dolphin Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
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