COLUMN | Quick updates: Wintermar’s optimism; Dolphin and Energy Drilling buy rigs; subsea newbuilds at last; DOF tug of war [Offshore Accounts]

We said it last year, we say it again: offshore is back!

Last week, we looked at the poor disclosure associated with the takeover of wind turbine installation vessel (WTIV) owner Eneti by Danish rival Cadeler. We concluded that the deal was marred by some very large payments to unknown parties who are creaming off tens of millions of dollars for reasons not properly explained, and by Cadeler's very optimistic and likely unrealistic plans to achieve US$106 million in annual synergies from the deal. The old adage that the more often you see the grinning visage of a CEO in the press, the more likely you should be to sell the company's stock definitely applies here.

This week, we look at the momentum building in offshore.

Wintermar reports gains

Whilst offshore wind continues to expand at a frantic pace, despite profit margins being thin, offshore oil and gas is also enjoying a renaissance. The recent investor presentation by Indonesian offshore support vessel (OSV) operator Wintermar shows how optimism is spreading globally for owners. Wintermar reported an 18 per cent increase in charter rates in April 2023 compared to the 2022 average for its higher specification vessels (slide 21), and the company is busy reactivating laid-up ships to meet market demand in South-East Asia. Wintermar acquired a number of cold-stacked UT755 design platform supply vessels (PSVs) from the former Deep Sea Supply fleet in 2022, including Sea Bass, along with five anchor handlers.

With charter rates in Indonesia still at half the levels of the industry peak in 2013, there remains plenty of upside for owners there. In the previous boom, Indonesia's implementation of tough cabotage laws on PSVs in December 2012 saw Wintermar achieve average day rates of over US$22,000 the following year. Today, leading edge rates in the region for PSVs with deck space of over 750 square metres are now close to US$30,000 per day, assisted by additional demand from windfarm projects in Taiwan.

Wintermar has low levels of debt, just 10 per cent of its assets, and its President Director Sugiman Layanto is famed for his ruthlessness and market savvy. With the company's revenue up 51 per cent in the six months to March 31, it is no surprise that Wintermar's share price is also up 57 per cent year on year.

As Simon Johnson, the CEO of Seadrill, said earlier this month, these high and rising charter rates mean offshore oil and gas contractors are finally going to be generating "a wall of cash" again.

Rig deals save older units from the scrapyard; Seadrill sells tenders

Seadrill itself has also been on a roll of late since emerging from Chapter Eleven restructuring in February 2022. That was Seadrill's second bankruptcy in the downturn, as what was once the largest rig owner struggled to manage its peak debt of over US$10 billion. In October last year, the publicly listed company sold seven jackup rigs to Saudi Arabian sovereign wealth fund owned ADES for US$628 million and used the proceeds to pay down US$473 million of debt. In February and March of this year, Seadrill repaid over US$150 million of debt and reached a net cash position, then in April announced the all stock acquisition of Aquadrill.

Aquadrill was formerly known as Seadrill Partners and had been spun out of Seadrill a decade ago, so the purchase reunited the two companies. Seadrill gained control of Aquadrill's four deepwater drillships, one harsh environment semi-sub, and three tender rigs, which it valued at US$958 million. Interestingly, in light of Cadeler's extravagant merger benefit claims, Seadrill said it could only identify annual synergies of US$70 million from the Aquadrill takeover, with most of it coming from the cancellation of Aquadrill's third party rig management contracts with Vantage, Diamond, and Energy Drilling.

Last week, Seadrill announced the sale of those three tender-assist units for US$85 million. The former manager, Energy Drilling of Singapore, is the buyer of T-15, T-16, and West Vencedor. T-15 was already on hire in Thailand until January 2024 through Energy Drilling, while the other two units were in long term lay-up. The acquisition doubles the size of the Energy Drilling fleet, which consists of two existing tender barges EDrill-1 and EDrill-2 and a semi-sub that was chartered in from the Chinese government-owned rig manager SinoOcean Offshore Engineering Assets Management (the former EDrill-3 now known as Guo Hai Tai He).

Mainland Chinese connection

The purchase saw Singapore shipowner Pioneer Logistics Holdings purchase shares in Energy Drilling to fund the acquisition, but both parties were very quiet on the exact sum invested by Pioneer and what percentage of Energy Drilling it now owns. Pioneer owns and manages a mixed fleet including supramax and capesize bulk carriers and MR1 oil tankers, but the ultimate beneficial owner is not clear. Whilst the company claims to be based in Singapore, its website gives an address in Qingdao in mainland China.

And then there were two

The sale of the tender rigs by Seadrill leaves only two players in that space: Energy Drilling and Malaysia's Sapura. The wisdom of Aquadrill's shareholders holding on to the tender rigs even through long lay-up is demonstrated by the fact that only last year, Sapura announced that it was selling three of its tender rigs for scrap. Sapura T-19 (built 2010), Sapura T-20 (built 2014), and Sapura Setia (built 2005) were sold to NKD Maritime for US$8.2 million, based on a scrap price of just US$280 per ton. By holding for a year, the owners of the three new rigs have achieved ten times the price. Patience can be very rewarding.

Sapura remains the largest operator in the sector with five semi-tender units and six tender rigs. The consolidation should enable Energy Drilling and Sapura to raise prices as the market rises.

Dolphin buys Transocean Duo

Transocean is another company that has benefited from patience and holding assets through the downturn. In 2020, the company was aggressive in its scrapping to reduce costs and drive down cash burn, selling four rigs for scrap in the first five months of the year, and then scrapping the 1983-built midwater semi-submersible rig Transocean 712 and the 2005-built ultra-deepwater semisub GSF Development Driller II, which had been cold-stacked in Romania for four years. In early 2021, Transocean announced it was also scrapping the harsh environment semi Leiv Eiriksson. The disposal of Transocean 712 and GSF Development Driller II led to Transocean incurring a non-cash charge of about US$420 million on the disposals.

Now that the market has recovered, Transocean is able to obtain ten times the scrap price. Last week, the company announced a deal to sell the semi-submersible rigs Paul B Loyd Jr (built in 1990) and Transocean Leader (built in 1987). Dolphin Drilling, which emerged Phoenix-like from the ruins of Fred Olsen Energy in 2019, said it was paying a total consideration of up to US$64.5 million for the pair. The transaction doubles the number of rigs Dolphin has on hire, from one, Blackford Dolphin in Nigeria, to two, as Paul B Loyd Jr is working in the UK sector of the North Sea.

Dolphin moves from three to five rigs

Dolphin then issued a separate press release to announce that Harbour Energy had issued a letter of intent to extend the rig's contract for three more years of work. Transocean Leader is cold-stacked in Britain, whereas Dolphin has its own semisubs, Borgland Dolphin and Bideford Dolphin, currently warm-stacked. Esgian reports that they are being "heavily marketed for the North Sea but also for international opportunities."

Esgian analyst Nermina Kulovic reckons Dolphin could get one of the warm-stacked rigs back in service and ready to work in 80 to 120 days at a cost of just US$20 million to US$25 million. Like Energy Drilling, Dolphin is financing the rig acquisition via a private placement of new shares in the company. It raised US$60 million and the company's two largest shareholders – Strategic Value Partners and SD Standard ETC – contributed a total of US$20 million together as well as committed to supporting Dolphin through a US$15 million revolving facility.

Ironically, by selling its oldest rigs, Transocean manages to make its own fleet younger, and Dolphin's average fleet age also drops after the purchase too.

Newbuilds at last

Norwegian company Agalas was formed only last year by NSK Ship Design and two Norwegian fishing companies, Ytterstad Fiskeriselskap and Kransvik Kystfiske. Agalas ordered its first vessel in December 2022, a cable layer (unsurprisingly, designed by NSK) under construction at Sefine Shipyard in Turkey. Delivery is scheduled for 2025.

Now Agalas has achieved an industry milestone by ordering the first subsea vessel of the new boom, also at Sefine. We said there would be newbuilds, but we didn't expect Agalas to be the first, nor that a subsea vessel would be ordered ahead of a PSV.

As you would expect, there is a green element and the new vessels will be the world's first subsea unit to utilise methanol dual-fuel and battery propulsion, which the designers believe will reduce carbon emissions by up to 70 per cent. The ship is currently uncontracted and has similar broad specifications to MMA Pinnacle and Southern Star, with accommodations for 100 people, a 150-ton AHC crane, dedicated ROV hangars, and a helideck.

DOF's tug of war

The long and tangled saga of subsea construction vessel owner DOF has started to get surreal. After numerous votes, deferments, and a revolt by the rebel shareholders last year over plans to try to restructure the US$2 billion that the company owed, DOF was finally plunged into administration earlier this year. It emerged with its debt holders owning the company in March.

Last Friday, June 23, DOF successfully completed an initial public offering (IPO) of the company's shares on the Oslo Stock Exchange. John Fredriksen, the famed Norwegian-Cypriot investor in Northern Drilling and tanker owner Frontline, announced he would buy nearly half the stock on offer in the IPO for around US$23 million, giving him around a five per cent stake in DOF.

Even before the company listed, Subsea 7 had launched, then aborted, a takeover bid for DOF. One of the benefits of writing a weekly column is that sometimes news just cancels itself out. In this case, DOF's board immediately rejected the proposal and Subsea 7 issued a sulky statement expressing disappointment that the board would not enter discussions. Subsea 7's short-lived proposal was worth NOK35 (US$3.24) per share on the basis of NOK7 (US$0.65) in cash and NOK28 (US$2.59) in newly issued shares in Subsea 7, which was a 25 per cent premium over the initial IPO price of NOK28 per share.

Norwegian analysts expect Subsea7 to return with a better offer later this year as Subsea 7's leading shareholder and chairman Kristian Siem has expressed a desire to consolidate the subsea construction segment, and DOF's fleet of 55 vessels makes an attractive fit.

The tug of war over DOF may look dramatic, but the lengthy restructuring has seen the company fall seriously behind the curve in industry technology. Starved of investment, DOF has barely a presence in the growing autonomous underwater vehicle (AUV) segment, where Ocean Infinity and latterly Reach Subsea have made significant investments. DOF also lacks uncrewed surface vessels (USVs), a segment where Fugro, XOcean, and Ocean Infinity have made massive technical improvements for remotely controlled surveys, and all three of these companies now operate large fleets.

Fighting over DOF's increasingly aged subsea construction vessels is all very well, but without investment and innovation, the company will not exist as a viable business within a decade.

Background Reading

You can read more information on Pioneer Logistics and Energy Drilling.

Here is Sapura's drilling fleet list.

Visit Agalas' Linkedin page.