Hans Jacob Bassoe, Esgian

Offshore rig values have taken a beating over the past few years, but how will they develop during the energy crisis as we move into 2022?

The beginning of the end…?

Ever since the oil price peaked in 2014, the offshore drilling rig market has been filled with disappointments. The build-up from 2005 to 2014 saw the offshore drilling fleet grow by 50% up to 900 rigs, which created an oversupply of rigs. Then, when OPEC began combating the growing US Shale production, it resulted in a collapse in the oil price and in the demand for rigs.

When the market saw a hint of recovery in 2019, the Covid pandemic entered the scene only to obliterate what hope that was left and competitive utilisation quickly fell from 78% in February to 64% in November.

Figure 1: Premium rigs value development / Source: Esgian Rig Values

In turn, rig values collapsed to all-time lows. As per figure 1, premium jackup values fell by 73%, 6th Gen harsh environment semisubs by 50%, while 7th Gen drillships fell by 74%. Soon after, several offshore rig contractors filed for Chapter 11.

Offshore rigs moving towards a brighter future

However, it appears that the winds are finally shifting.

Global demand for energy is on the rise and is expected to surpass pre-pandemic levels in 2022, indicating that the world is now moving past the Covid-19 pandemic. But, on the other hand, it seems we are heading towards an energy crisis.

The energy transition remains in the growth phase and is not ready to replace fossil fuels to cover the increasing demand. Meanwhile, investments in upstream oil & gas have been in decline ever since its peak in 2014. In consequence, we are facing a fossil – renewable supply gap, which can only be filled near-term by more fossil fuels.

Supply has significantly been reduced since 2014. The scrapping activities have reduced the competitive fleet to just over 580 rigs. Supply growth is also limited, as new constructions are extremely unlikely with yards still having more than 50 stranded assets under ownership.

These circumstances of reduced supply combined with increased demand for rigs to fill the fossil – renewable gap will lead to higher day rates and more rig sale activity and the upside of rig values could be substantial.

Rig deal landscape today

The rig deal landscape has been dominated by scrap and conversion transactions. Since 2014, the global fleet has decreased by 20%. Esgian Rig Service has observed that there is a clear alignment in price expectation between buyer and seller in the scrap and conversion markets, as per figure 2. A recent transaction completed was 2011-built, 6th Gen HE semisub Leo (ex West Leo) sold to BW Energy for conversion.

Figure 2: Buyer & Seller price expectation gap / Source: Esgian

Now, that the rig market seems to be on the cusp of a recovery, Esgian expects to see more distressed/opportunistic transactions. Such as, the acquisition of 7th Gen drillhsip Deep Value Driller (ex Bolette Dolphin) earlier this year. Esgian expects more semisub and jackup deals in the future as distressed units are starting to attract bids.

While many of the distressed rigs appear to have realistic price expectations, the strategic and stranded transactions have seen little activity of late, as owners seem to hold out for higher values. While most traditional major drilling contractors are not the asset buyers today as revenue growth can be achieved internally by reactivating stacked units.

However, this does not mean there are no deals.

There are buyers that have a strategic position to get contracts but they have a small fleets with high utilisation. These drillers are likely to take on additional assets to bid on new tenders and take advantage of the current increase in day rates.

Although the buyer and seller for strategic and stranded assets might not always be aligned, there have been recent deals that narrow the price expectation gap. Such as Dolphin’s deal to market the Nordic Spring and Nordic Winter with the right to purchase the rigs at a later stage.

In addition to this, there are buyers with government support that can afford stranded asset prices, such as the acquisition of West Cobalt reported by Esgian Rig Values, which was sold from a Korean yard to Turkish TPAO for a price in the region of $180 million.

Rig values development towards 2023

With rig values having collapsed by up to 75% since 2014, it appears values have bottomed out and even begun to increase again. Therefore, Esgian created a rig value scenario including certain factors that would increase the chance of rig retirements.

There are 195 rigs stacked today, and 18% of these rigs are built between 2005 and 2009, while 42% are built before 2005. Almost half of the stacked rigs have been so for a period longer than three years. Many of these rigs have an out-of-date SPS, which increases the reactivation cost, potentially to a point which makes no economic sense to reactivate.

Figure 3: List of type of rig by design / Source: Esgian

To decide which rigs could be considered retirement candidates, Esgian considered factors such as age, design, stacking period, SPS status and reactivation costs, as per figure 3. As a result of this analysis, it is estimated that there is potential for more than 80 rigs to be removed from the market by 2023.

Implementing these changes into Esgian Rig Analytic’s demand forecast, this could result in utilisation reaching above the magic level of 85%, at which dayrates historically have started to increase.

Figure 4: demand & utilisation forecast, including rig retirements / Source: Esgian Rig Analytics

Given these utilisation levels, day rates will increase and in turn the values.

Figure 4: Rig values development towards 2023 / Source: Esgian

As per figure 4, Esgian estimates dayrates possibly reaching $400,000 for modern drillships and 6th gen. HE semisubs, $250,000 for 6th gen Intl. semisubs and $120,000 for premium jackups. With OPEX maintaineded at the levels seen in figure 4, the value of rigs can increase considerably. Given the 5x EBITDA multiple, drillships could reach $450m, HE 6th Gen semis $400m, Intl 6th Gen $180m and Premium jackups at least $125m.

The marketed supply of rigs today is at 2005 levels and more rigs are expected to be retired in the coming years. Considering additional units entering the market is limited to stranded units at shipyards and reactivation of stacked rigs, the supply of rigs will be controlled and predictable. Eventually, these conditions, combined with increasing demand for energy, will result in higher utilisation, higher dayrates and therefore higher values for the rigs that have no time to die.

Photo: xmentoys / AdobeStock

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