COLUMN | Quick updates: Arabian Drilling and Schlumberger, Noble takes Maersk whilst Tullow is jilted by Capricorn for NewMed [Offshore Accounts]

COLUMN | Quick updates: Arabian Drilling and Schlumberger, Noble takes Maersk whilst Tullow is jilted by Capricorn for NewMed [Offshore Accounts]

Amid all the excitement of ADES (100 per cent owned by the Public Investment Fund of Saudi Arabia) buying over twenty jackup rigs for charter to Saudi Aramco, and with ARO Drilling (50 per cent owned by the Saudi Arabian state oil company) pushing forward its plans for a twenty jackup rig newbuilding programme for Saudi Aramco, it is time for Saudi Arabia's number three rig owner, Arabian Drilling Company, to step forward and share limelight, or perhaps cash in on the boom, depending on your perspective.

What's Arabian Drilling doing?

Arabian Drilling is the granddaddy of the Saudi Arabian scene, being founded in 1964 with a single offshore rig. In 1972 Schlumberger acquired a 49 per cent stake in the company, and in 2003 Saudi Arabia's Industrialization and Energy Services Company (TAQA) acquired the other 51 per cent share in Arabian Drilling. Of course, Saudi Arabia being the competitive, free-market paradise that it is, TAQA is a subsidiary of PIF.

Today, Arabian Drilling owns 38 land rigs and seven offshore rigs in the kingdom, and later this month the company will list a 30 per cent stake, 26.7 million shares, on the Saudi Arabian stock exchange, likely raising more than US$650 million and valuing the company at over US$2 billion. Around 17.7 million existing shares held by TAQA and nine million new shares are being offered to investors.

Schlumberger is not selling any of its stake but after the IPO will be diluted down to holding a 44 per cent stake, whilst TAQA's sale and dilution pushes its ownership down to 26 per cent. You may be able to browse the IPO documents here (unless you are in the United States).

Why this IPO is different

The Arabian Drilling IPO is interesting, as previous public listings of state companies in the Gulf have always left the state in control. Saudi Aramco, the world's largest oil company with a market capitalisation of over US$2 trillion on the Riyadh stock exchange, is more than 97 per cent owned by the Saudi government.

The Emirate of Abu Dhabi owns 84 per cent of ADNOC Drilling, with Baker Hughes owning another five per cent, and land driller Helmerich and Payne another one per cent, so private investors and retail shareholders own just 10 per cent of the Emirates' national drilling company.

Such tiny stakes give the minority shareholders no voice in the board room and no power to change the way these state companies are run – which is exactly the plan.

Schlumberger's patron in Saudi Arabia has power

Schlumberger deserves credit for its long-sighted, fifty-year investment in Arabian Drilling, and for remaining the largest shareholder. For now, at least.

Followers of Schlumberger will have noted that last month the CEO of Saudi Aramco flew to Luzern in Switzerland to address Schlumberger's Digital Forum. This level of support is unprecedented. It tells you that Saudi Aramco views Schlumberger as a serious business partner.

You can read Amin H. Nasser's speech here – he lambasted the unrealistic expectations many have held for the energy transition to renewables, saying that it has led to a chronic underinvestment in oil and gas, as "investments crashed by more than 50 per cent between 2014 and last year, from US$700 billion to a little over US$300 billion. The increases this year are too little, too late, too short-term."

He went on to chastise environmentalists and politicians in the west.

"The energy transition plan has been undermined by unrealistic scenarios and flawed assumptions because they have been mistakenly perceived as facts," Mr Nasser said. "For example, one scenario led many to assume that major oil use sectors would switch to alternatives almost overnight, and therefore oil demand would never return to pre-Covid levels."

Clearly, Aramco's target of charting around 90 jackup rigs next year is part of the company's campaign to turn that underinvestment around and to ensure that it can meet demand at pre-Covid levels.

Meanwhile, over at ADNOC Drilling…

<em>Photo: ADNOC Drilling</em>
Photo: ADNOC Drilling

ADNOC Drilling is bigger than Arabian Drilling by a long way and has a market capitalisation of over US$4 billion. It continues to grow, as Abu Dhabi, like Saudi Arabia, continues to invest in greater oil and gas production. ADNOC Drilling just announced it has signed a sale and purchase agreement to finalise the acquisition of two nearly new jackups at a total cost of US$140 million as its spending flurry continues.

The rigs will mobilise to Abu Dhabi and commence operations by the end of this year. The two jackups are reported by Hans Jacob Bassoe of Esgian (here) to be the last two of the three Argent jackups that ADNOC Drilling acquired from the creditors of bankrupt Mexican rig owner Oro Negro earlier this year. ADES also brought two Argent units, as we reported here.

Where exactly will all the offshore support vessels come from, which will supply materials to this surge of jackups in the Gulf?

Answers on a post card, please.

Noble completes its Maersk Drilling "merger"

<em>Photo: Maersk Drilling</em>
Photo: Maersk Drilling

On Friday September 30, parties and drinks were held around the world for the end of Maersk Drilling as an independent company. On Monday, October 3, its merger with Noble Corporation will close. The situation is bittersweet for the Maersk Drilling staff, as it's clear some of the savings and synergies from the deal will come from reducing headcount and firing people.

A.P. Moller Maersk Group, Maersk's parent company, will hold just over a quarter of the shares in the combined company and three Maersk appointees will sit on the six-person board of Noble after the deal closes – the board announcement in full is here.

Noble's gamble paid off

The deal has played out exactly as Noble CEO Robert W. Eifler had hoped. The British Competition and Markets Authority (CMA) had said that Noble must sell five of its rigs so that competition wasn't restricted in the North Sea. Shelf Drilling stepped up to the plate and announced that it would be paying US$375 million to acquire the jackups Noble Hans Deul, Noble Sam Hartley, Noble Sam Turner, Noble Houston Colbert and Noble Lloyd Noble. The deal gave Shelf an instant North Sea business it had never before had, and an instant contract backlog of US$250 million of contracts attached to the rigs.

In September, Shelf announced it had raised US$80 million of capital through a private placement of shares in the company that will own the five Remedy Rigs, and which will be listed on the Euronext stock exchange in Oslo. Additionally, Shelf raised US$250 million by issuing bonds paying 10.25 per cent interest secured against the rigs, and due in 2025. This seems to be to be a quality piece of high-yielding debt, given where the rig market is today and given the good underlying quality of the assets.

The CMA approved the deal last month, and it closes as this piece goes to press on October 3.

Why did Maersk sell?

A reader wrote in to ask what was the rationale of Maersk Drilling to merge with Noble Corporation. Maersk Drilling's dominant shareholder, the container shipping and ports conglomerate A. P. Moller Group, has been looking to exit its investment exposure to fossil fuels.

It sold Maersk Oil to Total in 2017, and spun off more than half of Maersk Drilling in 2019. Maersk Drilling had a modern fleet of both harsh-environment jackups and deepwater units, but it is subscale – and its parent is not willing to invest more capital to grow the business as a standalone, preferring to invest in freight forwarders and cargo airlines, instead, and high-capacity methanol-powered boxships.

Noble's vision

Noble emerged from Chapter 11 restructuring with low debt and promptly bought Pacific Drilling, which had also restructured. Merging with Maersk gives Noble scale and the debt associated with Maersk Drilling is easily absorbed onto the balance sheet of the combined entity.

Noble's investor presentation (here) from a month ago gives you a feeling of the strength of the combined entity that owns 18 deepwater floaters and 13 harsh-environment jackups. This total excludes Maersk Convincer, which has been sold to ADES for US$42.5 million upon completion of its contract in Brunei, and the 2003-built semi-sub Maersk Explorer, which is idle in Baku. Maersk took a US$99 million impairment on Explorer in its first half results, and Maersk will likely either scrap or sell to the state oil company of Azerbaijan, Socar, or to one of Socar's friends.

Of the remaining fleet of the combined entity, one rig is warm stacked and two are cold stacked, so there is limited capex required to bring units back into service. However, this also means that upside for shareholders is limited – there are few extra units to bring back into service to ramp up revenue when the market really surges. Transocean, for example, reported eleven drillships were idle or stacked in its July fleet status report (here), and one semi-sub.

This shortage of capacity suggests to me that once Maersk Drilling is "digested," Mr Eifler will be on the prowl for another acquisition for Noble. Again, Aquadrill, Diamond or even Vantage would be obvious candidates. Prior to its Chapter 11 reorganisation in 2020, Noble operated twelve floaters and thirteen jackups, so the acquisitions of Pacific Drilling and the "merger" with Maersk have barely taken it back to where it was before the Covid crisis upended the drilling market.

Tullow Oil: Jilted at the altar by Capricorn Energy

<em>Photo: Tullow Oil</em>
Photo: Tullow Oil

The trope of the spouse jilted by their lover at the altar is a Hollywood staple. It's the premise to films as diverse as Run, Fatboy, Run with Simon Pegg and Thandiwe Newton, and Runaway Bride with Richard Gere and Julia Roberts.

Even Legally Blonde features a hilarious scene where the heroine believes her partner will propose to her at dinner in a fancy restaurant, only for him to dump her because she's too blonde (here). Now Tullow Oil CEO Rahul Dhir faces a similar situation with his planned merger with Capricorn Energy. Tullow has been dumped, but not because it's too blonde.

In our coverage of the merger when it was announced in June (here), we had highlighted that Tullow had been a disaster zone and that the merger with Capricorn would shore up its balance sheet.

No love letters to Capricorn from investors

What was good for Tullow gaining access to all of Capricorn's cash clearly wasn't as good for Capricorn. So, after investors wrote letters over the summer pointing out how the deal was not in Capricorn's interests, that the company's CEO Simon Thomson was a fool, and that merging with Tullow would be like marrying a poor and ugly person, Cairn's board had a rethink.

You can read Upstream's excellent summary of the investor dissent here. "Ill-conceived" and "lacking strategic rationale" were amongst the kindest comments.

NewMed – new partner

On Friday, the Edinburgh-based company announced it had found a sexier, better suitor than Tullow. Capricorn will be merging with Israel's NewMed Energy.

Well, it's more of a takeover, but it gives Capricorn's shareholders more cash than the all-share Tullow deal, and gives NewMed (which was formerly known as Delek Drilling before this year) more international exposure and new acreage in Israel.

Crucially acquiring Capricorn gives NewMed the ability to operate fields and manage drilling itself. The ability to act as operator is something Capricorn is good at, but which NewMed has never really done itself, as Chevron operates its existing fields in Israel.

NewMed's Israeli riches

NewMed is a leading player in Israel's offshore gas discoveries, holding 45.3 per cent working interest in the giant Leviathan field, and an interest in the Tamar field. It's also profitable, with net earnings of US$84 million in the first quarter of 2022 (here) and US$405 million for the full year 2021.

Capricorn has exploration interests in Israel that will be of interest to NewMed. Capricorn has a 33.34 per cent working interest as operator in eight offshore licences offshore Israel, so there is a good fit there, too.

Last month, Yossi Abu, the CEO of NewMed Energy, said that the company was looking at a floating LNG unit for Phase Two of Leviathan's development, and that this might be more profitable that piping additional production from Israel to Egypt to exported via the Idku LNG plant near Alexandria. Interestingly, the deal with Capricorn means that NewMed will become the first Israeli company to operate an oil and gas field in Egypt when it acquires Capricorn's onshore blocks.

NewMed's controlling shareholder is the Delek Group, which holds 54 per cent of the votes in the company. Delek has committed it will vote for the deal to merge with Capricorn.

Eastern Mediterranean is a gas hotspot

Tungsten Explorer <em>(Photo: EDT Offshore)</em>
Tungsten Explorer (Photo: EDT Offshore)

The eastern Mediterranean continues to boom, with ENI announcing a new discovery in Block 6 offshore Cyprus, where it has drilled the Cronos exploration well using Vantage's Tungsten Explorer drillship.

Now, ENI has decided keep the drillship for longer to drill an appraisal well on the promising new gas reservoir, which is believed to contain 2.5 trillion cubic feet (70.79 billion cubic metres) of gas. The well was drilled in 2,287 metres of water, 160 kilometres southwest of Cyprus.

Capricorn investors get cash in hand up front

Rather than being handed a bunch of Tullow shares, Capricorn's shareholders will be paid US$620 million, equivalent to £1.72 (US$1.91) per share, as a cash special dividend immediately before the closing of the proposed deal. Then, Capricorn Energy will exchange every 2.34 of its own shares for one share in NewMed Energy.

This will result in Capricorn Energy's shareholders holding a stake of 10.3 per cent in the combined group, while NewMed Energy's shareholders will own the remaining stake of 89.7 per cent. Capricorn says that the total value of the deal with NewMed to Capricorn's shareholders is to 271p per share. This represents a 36 per cent premium to the closing price of 199p a day before the announcement of the deal with Tullow Oil, and a 12 per cent premium to the Capricorn share price last Thursday, before the NewMed deal was announced.

Background reading

We first covered how, in Saudi Arabia, Qatar and the UAE, public investment by the state is increasingly squeezing out private sector businesses from the oilfield services industry, from drilling rigs to supply boats and even forklift trucks, here in 2021.

More details on Shelf Drilling's finances and the purchase of the five Remedy Rigs here.

Our coverage of the booming Eastern Mediterranean gas discoveries from 2020 is here.

Our coverage of Capricorn's previous history as Cairn Energy and its mega law suit against the Government of India is here.

For a daily Capricorn horoscope click here. Capricorns are ambitious, organised, practical, and goal-oriented, and they don't mind the hustle. So should be a perfect fit with NewMed.

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