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Last Updated: April 13, 2016
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The news coming out of Chinese shipyards regarding deliveries of the 87 jackups they still have under construction is that there is precious little news. All is silent with the occasional revelation that individual rigs remain under construction or have been launched.

Currently there are seventy (70) jackups under construction as various Chinese yards. Of these there are twenty-five (25) that have been ordered by bona-fide drilling contractors such as Seadrill, Northern Offshore, COSL, Dynamic, KS Drilling, Shengli and Apexindo. The remaining forty-five (45) have all been ordered on pure speculation with the intention of flipping them for a profit.

Deliveries on some of the seventy (70) have already been officially pushed back into late 2016 or later or were naturally behind schedule anyway. Twenty-seven (27) units were to have been delivered in 2015 and first quarter of 2016 according to their original construction schedule but have not appeared in the market. A high percentage of these are probably ready for delivery but are yet to be accepted by their owners. Not much information is being made available on these units.

Even for the twenty-five (25) rigs ordered by drilling companies there is no certainty that the drillers will accept delivery of the rigs they have ordered, although Shengli and Northern Offshore appear set to accept their rigs when ready. Seadrill have announced that they will not take delivery of any of their eight jackups in 2016 and then further announced that they consider the eight (8) rigs under construction at DSIC to be “an option to buy” which sounds ominous for DSIC. It would be a surprise if Dynamic, Apexindo and KS Drilling took delivery of their rigs without a contract in place, a remote event at this juncture. Paragon has continually stated that accepting delivery of the three Prospector rigs still under construction is unlikely. Some of the threats are probably posturing as the rigs are likely to be accepted once the market improves. Its just that the owners do not want to pay for them until then.

But the real question is what will happen to the other forty-five (45) jackups whose chances of being flipped for a profit are currently absolutely zero and whose chances of making any sale at all would depend on how much of a hit they are prepared to take on the original shipyard price. As most have only made a down payment of 5% they have relatively little to lose by walking away as compared to paying the $180-200m to the shipyard, taking delivery, and then perhaps only being able to sell on for $140m. This though is a moot point as the owners would not be able to get financing from the banks without a contract for the rig and in such a cut throat market as this one it is highly unlikely that they would win any contracts when competing against bone-fide drillers, themselves desperate for work.

Of course we have John Fredriksen sniffing around with his Sandbox venture with the stated intention of buying up distressed assets. Maersk Drilling has indicated they are in a position to move in on any opportunities but they will only aim for high spec harsh environment unit of which there are very few under construction. There are also rumours of a certain offshoot US drilling company in talks with CMIC to examine the possibility of taking over operatorship of their unsold jackup inventory on some sort of a lease purchase deal, presumably they would then be able to start a fleet replenishment exercise and condemn their old jackups to the scrapyard. There is no doubt there are other clever deals being thought through at present.

The emergence of Iran, allowed back into the international market, is seen by many of the speculators as The Opportunity, but it has been so since the building boom started and very few units were actually picked up by Iran, mostly 300ft rated smaller units. The National Iranian Drilling Company is said to be in negotiations with domestic and international investors from Asia and Europe with a view to acquiring five (5) jackups with a budget at $200 million for each and is said to have signed a memorandum of understanding with Chinese companies apparently based on a lease purchase scenario. Owners may be salivating but five (5) out of forty-five (45) is hardly encouraging. The other great hope was Mexico but that market has collapsed completely.

However, it is known that most of the Chinese yards are being very lenient with the owners, allowing completed units to remain in the yard at no cost and offering to help find buyers for the rigs at which point they would refund the down payment to the original owners, But this is certainly not a seller’s market. Patently this shows the yards are taking a very patient and long term view, albeit knowing they have government guarantees in their back pocket in case things don’t go as planned.

Although there are twelve (12) shipyards in China currently constructing jackups, three (3), namely CMHI, SWS and DSIC, have the most exposure and account for forty (40) of the seventy (70)) units under construction with CMHI most exposed with eighteen (18). With little prospects of sales in the near future it is not surprising there is little news nor that they are showing leniency to owners when the alternative is dumping them on the market at fire sale prices.

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