This exchange was from this week's SDRL CC. SDRL is restating what all the newbuild jackup drillers are saying; 'old jackups are going away' while the Credit Suisse guy is questioning this mantra as it applies to jackups.
Clearly there is a middle ground here as PGN with all its "old" jackups has outperformed the newbuild jackup drillers all year long wrt contract renewals in a number of areas around the world.
Gregory Lewis - Credit Suisse
Okay, great. And then just one bigger question. You mentioned comments earlier about the jack-up fleet, your expectation that we’re going to see a lot of rigs go idle and I mean, clearly you are in a position to say that given the quality of your jack-up fleet. I guess, what I would just ask clearly there is a difference between what’s happened in the floater fleet over the last call at five to ten years in terms of a step-up in technology and larger assets. Should we really be thinking that a lot of the older jack-ups will be removed from the fleet or just given the fact that there really hasn’t been a real step change in the type of – what is – in the technological change between the jack-up is that may be the jack-ups we won’t see as much fleet removable? Is that part of why we haven’t seen that happen thus far?
Per Wullf - Chief Executive Officer and President
No, I think they’re easier and cheaper to stack so people haven’t made the hard decisions but the mere fact of it is out of the fleet more than 50% of it is more than 30 years old. So overtime although it hasn’t reached the level and hasn’t had kind of the discipline that drilling contractors with all of the fleets have shown on the floater space, it will come as the cycle progresses because it just doesn’t make sense to keep operating and keep putting money into those assets. So I think it will take a longer time to play out but it will be there. Show of production is still part of the overall picture. But our customers continue to favor newer more capable assets. So those assets will continue to have a utilization advantage in the market. And eventually the older ones will fade away.
Thanks J. Concerning C20051 rate reduction that will be recognized starting Q3 FWIW:
"Dayrate reduction from $176K to $125K for the period of early
May 2015 to late June 2015 will be recognized over the
remaining term of the contract beginning July 1, 2015"
HERO's bankruptcy is having no effect on their operations. While there is an oversupply HERO only has four jackups available in the next 4-5 years that compete with PGN's. Most of HERO's jackups are mat-supported jackups. Check their FSR
Inventories are way up. Ir happens and will resolve over the coming quarters as they usually don't write down much. Netting out debt, liquid assets/working capital is about 2 bucks below share price.
"These conditions reinforce our view that weak market conditions for our
sector will continue through 2015 and 2016. We anticipate an uptick in
contract placements across the sector as we go through the second half
of 2015, especially in the jackup market...
"For shallow water, average commodity price hurdles to support drilling
are generally lower than deepwater. As such, we are seeing more customer
activity in shallow water, especially as we go into 2016, although
competition is still intense for these opportunities.
"Moving to the order book for competitive jackups, there are
approximately 45 newbuilds with expected deliveries by year-end 2015,
all of which are uncontracted. More than 65% of these uncontracted
deliveries are with speculators that have never operated a rig. And it
remains to be seen whether these approximately 30 units will be able to
"We have already seen the cancellation and delays of
many newbuild jackups. This will likely continue as companies who
ordered these rigs need to put off large milestone CapEx payment, given
limited contracting opportunities. This in turn would put more pressure
on shipyards that will have to assess continued investment in the
construction partially completed rigs."
PGN uses 15 years old as their industry jackup age index vs the more often quoted 30 years while Rowan cites both 30- and 40 year old groups. But clearly both are good jackup drillers and both put stock into well maintained older rigs; PGN in standard spec rigs and Rowan in both standard and hi-spec rigs. Different global jackup fleet ages are listed below.
Here's jackup data I get from PGN's Johnson Rice & co 9/30/14 energy conf(slide 27) and Rowan presentation June/2015(slide 16):
There are currently 323 standard spec jackups 15 yrs old of which 257 are ILC and 66 are mat-supported jackups. As most probably know, ILC jackups have become the industry standard. And while mat-supported jackups are still used, mostly in the GOM, these will often be the first to get scrapped. All of PGN's jackups are ILC.
289 are 30 years old
37 are 40 years old
Also Rowan shows 68 of 117 newbuild jackups are speculator rigs
On a related note, HERO acquired its two hi-spec newbuild jackups in 2013 by acquiring Discovery Offshore in a transaction that was similar to PGN's Prospector acquisition in that it involved two similar rigs with a total spend of about $550 million all in. The main difference now, and it is a big one, is that HERO's rigs came with no backlog and both are idle and have been for quite some time racking up more debt/interest, while at least PGN's Prospector rigs came with some really good contracts/backlog.
I listened to some of the HERO CC the other day and man was it doom and gloom. 388 jackups outside GOM contracted with 100 rolling off this year, another 100 by end 2016 and yet another 100 newbuilds by end 2016. That's a potential surplus of 300 jackups(200 rolling off/100 newbuild). Still, I really got the impression they were talking their book to make them sound a little less incompetent so I am meekly raising a red flag. Here are a couple omissions:
1. I think most of the jackups(75%)rolling off contract are on jobs that will continue drilling either with present rigs or other(newbuild) so that would eat up 150 available jackups.
2. Of the 100 newbuilds 60+ are speculators' rigs with no one to manage or bid them on jobs let alone crew them. In addition there are many of the drillers'(eg SDRL and RIG)newbuilds being delayed substantially. This may be just kicking the can down the road but still eats up another 75 rigs maybe for 2016.
3. Then there are retirements like those being announced by Rowan, Maersk, Hercules etc and probably quite a few more by smaller drillers with lesser maintained jackups. Hard to guess that number but I think it will be at least 25 thru 2016.
So that could be a total of 250 'surplus' rigs through 2016 that find new work or aren't marketed/competing and which would produce a more accurate number of 50 excess jackups in a market that would be contracting 340 jackups if 75% rolling off continue drilling. If that guesstimate materializes, that is a manageable number I think for PGN particularly since they executing as well or better than most jackup drillers. Eg HERO's hi-spec newbuild in the North Sea lost out on a contract bid they were "expecting to win" to what is very likely an older rig; probably one of Ensco or PGN's recent multi-year North Sea jackup contracts.
One other comparison since we're both playing the airlines. Airline execs(see AAL) are almost entirely selling let alone not buying even though they are the most profitable they have ever been, are down 25-30% off their share price highs and are looking at a "lower for longer" oil price environment.
I get your point. OTOH I don't think the market has ever been terribly impressed with insider purchases. To make a comparison, HERO management bought shares of HERO(not option grants) nearly the whole way down the drain.
"The financing proceeds have substantially increased the company's liquidity. We are continuing to evaluate potential options for using the proceeds to strengthen our balance sheet and enhance shareholder value. In the meantime, our business continues to generate cash flow through our safe, reliable, and efficient operations and we are actively reducing our operating expenses both in the office and the field. Moreover, our recent announcement of the addition of a combined total of six years of backlog on three of our jackup units illustrates the ongoing desirability of our standard specification assets while many newbuild rigs continue to sit idle."
Layin pretty low otherwise though I do like the airlines as a hedge against all the energy stuff.
You sir are too kind. You articulated some negatives pretty well so i'll just post the flip side. Not posting numbers but am happy to discuss points. The massive overbuild could lead to PGN's BK..OR...it could have a silver lining for PGN. This is the most critical issue facing PGN. Most of these newbuilds are being stacked, many cold stacked and it could be years before they are drilling and probably not for the current owners. PGN has the tools, whether by sale-leaseback or as 3rd party operator to benefit from this. In the meantime, PGN has been competing successfully against these newbuilds for term contracts all around the world(India,ME,NorthSea).
If PGN keeps most of their jackups and at least a few floaters drilling, even at rates recently signed they should be fine, particularly if they buy distressed debt. Capex can be caught back up as part of negotiated contracts or they can scrap or leave the rig stacked. Prospector rigs I think will be drilling for Total for a long time albeit at lower rates come 2016/17 which will be fine as the lease rate comes down too then. We both agree on buying back debt. The debt is marked down because the rig values are too. Older jackups are now being valued at $10-15 million but that is based on the assumption they will likely be scrapped near term. I could be wrong but it appears to me PGN is proving that assumption wrong.
Only 2 of the 14 blocks up for auction were auctioned off today. From rigzone: "Both the shallow water exploration and production contracts were awarded to the same consortium made up of Mexico's Sierra Oil & Gas, U.S. firm Talos Energy and Britain's Premier Oil"
So apparently not a deluge of interest in drilling for oil at these prices and in a country that has a very recent history of unilaterally cancelling drilling contracts for convenience. What are those E&P's thinking!?!?
People that keep raising issues like Prospector which is separate and adequately funded or companies like Hercules or Seahawk like you do show highly misplaced bias. Further you are in denial about the success PGN is having wrt to rigs outside Mexico, maybe Brazil too. And you don't understand this business if you think LT price of $10 is a fantasy. Operators are voting and they are telling you they don't want Formula ones, they want mini-vans and you can't even see that.
"alot of smart bond investors are pricing the debts at 30 cents"
Where do those bond investors get their DD from? From guys like Ole Slorer and his crew at MS who wrote the manual and who have been stunningly wrong thus far about PGN's rigs. I have modeled out various scenarios as have others here as well I'm sure. While a bond price of 30 cents may predict a 90% chance of bankruptcy, consider the source. I would put it long term at 50/50 chance of one buck down and ten bucks up.
Stock/bond prices spell doom, reflecting sentiment of analysts, pundits, bloggers and yahooligans alike. The sentiment mirrors an incredibly in-depth(and totally wrong wrt PGN) look at the OSD industry done by Morgan Stanley back in April. One can access it by searching: "morgan stanley offshore drilling manual spring 2015" and you can click on the investorvillage site it will pull up. PGN's rigs are listed on page 19 of the report.
The report shows all of PGN's rigs rolling off contract going forward from May/2015 and states clearly that MS expects all,yes ALL of these rigs will "likely" be stacked and then scrapped as they roll off their contracts. Sound familiar? It should because it is the recurring fictitious theme of shorts here and elsewhere that PGN's rigs are dead in the water.
But what's the reality? PGN has had, since that report, 15 of 17 rigs up for renewals sign new extensions/new contracts. Hardly the "likely" 100% attrition of PGN rigs MS predicted. This is a pretty amazing contradiction between what Wall Street has been saying and PGN's actual performance. And in the last two months alone PGN has signed four of these "likely to be scrapped" rigs to nicely profitable multi-year long term contracts, averaging over $90KPD rates where opex averages $45KPD. What's even more fascinating is that these four PGN long term contracts in the last few months are probably more than those signed by the ENTIRE UDW industry combined.