So you can now buy three (3) five-year old ultra-deepwater drillships for the price of one new build jackup out of China!
Ex-Schahin ultra-deepwater drillship Cerrado went under the hammer and was sold to the only bidder at the reserve price of $65 million, a bargain basement price if there ever was one. Quite a punt by Ocean Rig betting on the eventual recovery of the ultra-deepwater market which is the drilling industries worst performing sector in the current downturn.
An earlier auction, for Odfjell operated drillship Deepsea Metro 2, also just five (5) years old, failed to elicit even one bid. But then, by comparison, the reserve price had been set to a whopping $175 million, almost three times higher than the reserve price for the Cerrado. To put this into context the published construction costs for the Cerrado (now Ocean Rig Paros) and Deepsea Metro 2 were $678m and $652m respectively. Some depreciation. Deepsea Metro 2only had three years of operations under its belt and the Cerrado only managed three years out of a ten-year contract before it was early terminated by Petrobras.
So where does this leave the likes of Hyundai, DSME, Jurong, Samsung and COSCO, all of whom have UDW units that have had their construction contracts terminated by their original owners. Add to this list of unwanted assets the KeppelFELS speculative drillshipCan Do plus potentially any of the near-to-completion rigs that were ordered by Sete Brasil which may be left to Keppel and Jurong to find alternative buyers if they choose to complete construction. Then there is still the possibility of further cancellations of other units currently under construction. The construction costs for the seven (7) rejected ultra-deepwater rigs are stated as between $672m and $740m. One of these, the ill-fated Dalian Developer must have cost its various owners a combined number in excess of $2 billion as it has been under various stages of construction and bankruptcy since January 2006. The news of the Cerrado sale must have reverberated around those shipyards with assets for sale, causing a high degree of heartburn.
And how does this market sector look today? For rigs capable of drilling in 7,500ft water depths or more and excluding Brazilian owned units which, at least at present, do not compete in markets other than within Brazil (honorary exception SSV Catarina), the worlds competitive fleet consists of one hundred and fifty-seven (157) ultra-deepwater semi-subs and drillships. There are a further twenty-six (26) in various stages of construction, only five (5) of which have contracts to go to. Many of those under construction have had their delivery dates pushed back into 2017 and even as far back as 2020. As mentioned above seven (7) of them have had their construction contracts cancelled with ownership reverting to the shipyard.
Of the competitive fleet; i.e. excluding those under construction, 42% are currently out of work, that is sixty-six (66) units listed as “available”, although five (5) do have contracts to go to later in the year. Another eight (8) are currently stacked/on standby on contract and a further fourteen (14) units have contracts that terminate in the second half of this year. Of course even having a valid contract is no longer any guarantee that you will be working until the end of your contract; of the seventy-one (71) cold stacked/warm stacked and recently scrapped UDW units, thirty-one (31) or 43% of these suffered early termination of contract. So unless there is a rush of fixtures this year, a highly unlikely event, there will be just under 50% of the competitive fleet out of work and “available,”
It is not just the threat of early terminations. Many operators have forced contractors to lower their dayrates through blend-and-extend deals or straight forward ultimatums. From a high of $640,000 a day in the halcyon days of the not too distant past the most recent fixtures have been as low as between $190,000-$250,000. Adding to these woes are the cancelled and postponed deepwater projects, slashed budgets from the operators, cessation of exploration work and a fluctuating oil price that is still nowhere near the level needed for the deepwater market to recover.
All in all, is this a brave move by Ocean Rig or a foolish one? There was certainly no interest from their peers in either rig that was put up for auction, even at $65 million.
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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