![COLUMN | Riding the rollercoaster (again): ARO, Deep Value Driller, Dolphin, UDS, MEO and Uniwise [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F220919-Offshore-Accounts1.jpg?w=480&auto=format%2Ccompress&fit=max)
Last week (here), we looked at the recovery of the drilling market, epitomised by the return to a public listing of Dolphin Drilling in Oslo on September 15. A few days later, the great and the good of the offshore industry gathered for the annual Pareto Securities' Energy Conference in Oslo. The mood was buoyant.
Pareto's conference prompted a slew of headlines that day rates for deepwater drilling units will soon be touching half a million US dollars a day again, whilst spot rates on LNG carriers are racing towards US$300,000 per day.
One company that is clearly keen to avoid such high prices is Saudi Aramco. Valaris and Saudi Aramco have a 50:50 joint venture called ARO. In August, in an insightful presentation (here), Valaris presented an ambitious newbuilding programme of jackups for the company. ARO intends to construct eighteen newbuild rigs in Saudi Arabia, supported by attractive, long-term contracts with… none other than Saudi Aramco.
The first two newbuild ARO jackups in the twenty-rig programme are scheduled to be delivered in the first half of 2023 from UAE-based Lamprell shipyard, now owned by Thunderball Investments and its parent Blofeld (here).
Then, eighteen new rigs will be built at Saudi Arabia's new Maritime Yard – The King Salman International Complex for Maritime Industries and Services, which Valaris says is a cornerstone project in the Saudi 2030 Vision of Crown Prince Mohammed bin Sultan. The orders for the first in-country units will be placed next year, Valaris says.
So much for the Crown Prince's efforts to diversify away from oil and gas, although diversifying away from Chinese shipyards might be in the kingdom's interests.
While Saudi Arabia is a frenzy of activity, with another Saudi-state owned company ADES buying fifteen jackup rigs for Saudi Aramco (here), others are profiting by inactivity.
In Voltaire's Candide, an eighteenth-century satire, and very much the product of its age, an old woman asks a thought-provoking question.
"I want to know which is worse," she asks, "to be ravished a hundred times by negro pirates, to have a buttock cut off, to run the gauntlet among the Bulgarians, to be whipped and hanged at an auto-da-fé, to be dissected, to row in the galleys—in short, to go through all the miseries we have undergone, or to stay here and have nothing to do?"
The shareholders of Deep Value Driller, the Norwegian speculative venture run by the former Borr Drilling CEO, Svend Anton Maier, fortunately don't have to worry.
Doing nothing has proved to be a great strategy. The company owns one high specification ultra-deepwater seventh generation drillship, Deep Value Driller. This rig was built in 2014 at Hyundai Heavy Industries as Bolette Dolphin by Fred Olsen Energy and was purchased by its current owners for US$85 million in 2021 out of bankruptcy.
The drillship last worked for Anadarko off Colombia in 2017 for its former owners, and is sitting warm stacked in Westcon Yard in Ølensvåg, Norway. It has stayed there and had nothing to do, and its value has shot up.
Whilst Mr Maier says that "the company's strategy is to secure contracts for its drillship with top-tier drilling contractors worldwide," with the company's equity currently valued at US$130 million and a balance sheet which is virtually debt-free, I very much doubt the owners would turn down an offer for the unit at US$160 million, or a charter at US$450,000 per day.
Indeed, Deep Value Driller also says that "as part of its strategy [it] has an ambition to create and maximise value for its customers and investors…"
The shareholders and management don't need to worry about pirates or buttock-chopping. The market is looking after them very nicely. Watch this space!
This flush of fresh confidence and the flush of fresh cash into offshore suggests the rollercoaster has further to run… so, what can we expect?
We can expect to see private equity owners heading for the door from their offshore investments and listing the companies bought in the bottom of the downturn… many have been holding on through Covid, exceeding the normal three-to-five year time frame for exiting.
The fate of McDermott – the troubled American construction giant that emerged from bankruptcy in 2020, wiped clean of its debts and owned by its creditors – remains unknown, however. McDermott recently took delivery of its upgraded J-lay construction vessel Amazon from IHC Shipyard in the Netherlands (here) and is mobilising the ship to Senegal to work on BP's giant GTA gas project, along with Nortrans' Compact Semi-Sub Temis, Emas' accommodation barge Lewek Chancellor, and half a dozen Tidewater vessels contracted by various entities working on the project.
McDermott appears to be looking for fresh equity and new investors, as the rather ominous appearance of a "Data Room" on its website suggests (here). In April, McDermott subsidiary Chicago Bridge and Iron Company filed for arbitration against the Colombian government at the International Center for Settlement of Investment Disputes (here), escalating a billion dollar dispute that has raged for six years now and featured lurid claims of bribery, allegations of millions of dollars of payments to sex workers in Cartagena, and Interpol arrest warrants.
McDermott's problem is that it is probably too big and possibly too unprofitable to be acquired by another offshore construction company. Saipem has widely publicised problems of its own, as does Sapura in Malaysia.
Rival Subsea 7 recently poured a slug of cash into an equity raising at its Seaway 7 wind and renewables subsisiary, so it is unlikely be to be bidding for McDermott. Two weeks ago, Subsea 7 announced (here) that it would subscribe to new Seaway 7 shares, in the capital raising exercise, investing approximately US$144 million, in line with its current 72 per cent shareholding in Seaway 7.
Seaway 7 currently has two significant newbuild vessels under construction, Seaway Alfa Lift and Seaway Ventus. The company expects both vessels to be delivered during 2023 and to enter operations in the first half of 2024. So, for now, Subsea7's spare cash has gone to invest in growth in its renewables business.
That leaves only the National Petroleum Construction Company of Abu Dhabi as a viable buyer, which would then be able to take the lion's share of the entire Gulf construction market if it bought McDermott.
With the current weakness of many balance sheets in offshore, smaller acquisitions look more credible. The upturn means that several smaller drilling companies will likely be acquired – just as Pacific Drilling and Maersk were swallowed by Noble Corporation. Look to see Deep Value Driller, Northern Ocean, Aquadrill, Diamond Offshore Drilling, and Vantage potentially lose their independence, and be snapped up.
Japan Drilling Company (JDC) may also end up as a consolidation play, probably at the hands of its Qatari partners, Gulf Drilling International. JDC is owned by private equity after a restructuring and private equity is always looking for an exit when the market turns up, especially in the current market where other portfolio companies in other sectors will be impacted by the global slowdown.
Following its listing, Dolphin announced that it would re upgrading the semisub Borgland Dolphin, which is currently stacked off Norway, to increase and modernise its accommodation. Dolphin says it is targeting contracts for the rig on the UK Continental Shelf, starting next year.
"Offshore drilling is coming back, big time," Dolphin's CEO Bjornar Iversen declared to the press, so he is putting investors' money in the stacked unit to make this happen. Notwithstanding the award of a contract in Nigeria for the semisub Blackford Dolphin, none of Dolphin's three rigs are actually working at the moment, to my knowledge.
Before the listing last week, Dolphin was 52 per cent owned by Strategic Value Partners and 38 per cent by Standard ELO, according to a filing with Euronext (here).
We can also expect to see the survivors of the last boom and bust cycle finally get sold off in Asia, businesses like the K Subsea Group (the restructured and renamed Kreuz Subsea) of Singapore. With calamitous timing, in March 2014, Kreuz was acquired by the Headland private equity fund for SG$445.6m (US$317 million at today's exchange rate).
Kreuz then went through the predictable cycle of pain, staff and fleet reduction, and shrinkage as the market collapsed. Headland wrote off its investment, we understand, but the company's remaining modern dive support vessel (DSV) Challenger (ex-Kreuz Challenger, built in 2017 at Vard and fitted with a single bell 12-man saturation system) is on contract with Brunei Shell, so the business survives under its new name and new legal entities.
Shel Hutton, the founder and CEO of Ultra Deep Solutions (UDS), appears to be having a very bad year, as his fleet continues to shrink. We reported in April how Mermaid Maritime of Thailand has taken control of the DSV Van Gogh away from UDS (here).
Now it seems that the much-vaunted UDS DSV Andy Warhol has never left China and sits idle in Qingdao where it has been renamed Wu Chuan Shi 21. Either that's a modernist painter of whom I was hitherto unaware, or a sign that the ship is not going into service for UDS.
Final newbuilding DSV Ultra Deep Matisse also remains in Shenzhen, seemingly undelivered from China Merchants Heavy Industry yard there, as well.
Now Viridian Maritime of Singapore has announced that it has taken under its management the DP2 multipurpose specialised diving support construction vessel (DSCV) Lichtenstein from UDS. The accompanying photo (here) is one of the most shocking photos of any five year old vessel I have ever seen.
The ship resembles a Russian Navy vessel after a bad day off Sevastopol.
Lichtenstein has, on paper, a very high specification, with an 18-man twin-bell Saturation Diving system, a 140-tonne AHC offshore crane, and accommodations for up to 130 personnel with SPS compliance. Unfortunately, Viridian's photos suggest millions and millions will have to be spent on the ship to bring it back to service.
Then there was one. UDS' last operational vessel Picasso is also idle in Singapore according to AIS data (here). Who will step up to the plate?
Emas Offshore of Singapore has been through similar pain as Kreuz, and is currently controlled by Singaporean bank DBS, which is attempting to sell off the remaining vessels one by one, advised by DBS' favourite restructuring expert nTan, a company whose presence at a Singapore marine contractor is often expensive and long lasting.
Medium term, we can also expect the buyer of Pacific Radiance's fleet, E-Nav Offshore of Mexico, to list. E-Nav is owned by a Mexican private equity house, according to this biography of its founder and Vice President, Diego Aguilar.
Crewboat operator MEO in Singapore, owned by DBS and a Hong Kong-based private equity company, has restructured and is in better shape. In fact, there are signs that it is being prepared for a return to the public markets in the medium term, after listings in Sydney and Singapore before the crash, and before the business was taken private by Champ and Headland private equity houses.
Under its new private equity owners, MEO has already begun to reinvest into the new cycle, after a hiatus in newbuild orders for the company, which has left its fleet profile looking a little "mature".
In 2015, the company took delivery of the crew boats Uniexpress 25 and Uniexpress 26 (specifications here) from Singapore's Penguin Shipyard International into Uniwise Offshore, MEO's Thai joint venture with Unithai Group. Then the downturn hit, MEO went into default and was restructured with a debt for equity swap, which saw DBS emerge as the controlling shareholder and the Aussie private equity companies lose their shares. It was to be seven years to the next newbuilding for the company.
Our earlier coverage of MEO's troubled history under private equity ownership is here. Newbuildings were far from the company's priority as it battled to avoid liquidation and nTan's efforts to sell it, as well as escape court administration.
This April, Uniwise took delivery of Uniexpress 27, a Thai-flagged crewboat for eighty passengers with a maximum speed of 29 knots, also built at Penguin. That took MEO's Thai fleet to over thirty vessels, and its total crewboat fleet to sixty units.
The storm has passed.
Finally, in May, MEO placed an order with for another five new crewboats, again with Penguin, again capable of carrying 80 passengers in a two by two configuration of business class style seats, and again built to Penguin's proprietary Flex-40X and Flex-42X designs. The seats are all fitted with USB ports for phone charging. MEO says it will take delivery of the newbuild crewboats in 2023 and 2024, as part of what its CEO Darren Ang describes as a "fleet rejuvenation programme." The Flex design vessels can also carry up to 60 tonnes of deck cargo, as well as 82 cubic metres of fuel and thirty tons of freshwater.
Facing a challenge from MMA Offshore's new project management division, and from Astro in the Middle East, MEO also moved to hoover up nine offshore flat top barges late last year and says it is utilising the barges in cargo transportation projects across multiple regions. MEO has a barge fleet of around 30 units in the range of 250-foot to 400-foot (76-metre to 121-metre) self-ballastable barges.
If MEO is building crewboats again, and ARO is building new rigs, we can see clear signs of a market recovery in oil and gas both at the low end and the high end. The lack of newbuilds in the middle segment is probably due to worse over-capacity, and by a desire by many European companies to invest in new windfarm support vessels, rather than standard platform supply vessels and anchor handlers.
For many offshore support vessel holders, doing nothing and simply letting valuations recover will be an easy way to strengthen their businesses and balance sheets.
But how long to hold? The rollercoaster has raced up, driven by Putin's invasion of Ukraine and the restriction of Russian gas supplies to Europe. But now there's a potential global slowdown, which typically presages weakness in oil and gas prices as consumption softens.
Hang on tight. Oil and gas is never boring, as fear and greed oscillate wildly.
Background reading
A fascinating interview with the president of JDC, Takanori Hioki, is here.
Uniwise/Unithai's fleet details are here – given that crewboats are considered to have a working life of 15 years, you can see the age problem the company faces.
Former McDermott CEO David Dickson, who walked away from the car-crash of the company's bankruptcy and the catastrophic acquisition of Chicago Bridge and Iron (here) was recently appointed as CEO to an Australian-listed lithium miner, Lake Resources (here). Of course, at the time of writing. Lake's website was down, and the company is not actually producing any commercial quantities of lithium – instead it has an "aspirational target" it wants to produce. Last week announced it was in dispute with its project partner, Lilac Solutions, which sent Lake's shares crashing 20 per cent (here). And where are its four lithium mining projects, you ask?
Oh, Argentina… so, what could possibly go wrong there? Good luck, Mr Dickson. If it does go wrong, at least his experience of a massive corporate failure at McDermott should stand him in good stead.
Evita music to fade (here).
