COLUMN | The demise of Diamond Offshore: Lessons for the future [Offshore Accounts]

COLUMN | The demise of Diamond Offshore: Lessons for the future [Offshore Accounts]

Last week saw Noble Corporation cement its place as the great consolidator in the offshore drilling industry recovery. Seven days ago, Noble announced that it was buying Diamond Offshore Drilling in a stock plus cash transaction valuing the company at around US$1.6 billion, a deal unanimously approved by the boards of both companies.

When the deal closes at the end of the year, Diamond shareholders will receive 0.2316 shares of Noble for each share in Diamond that they owned, plus US$5.65 in cash per share. Noble will finance the cash payment to Diamond's shareholders from a new US$600 million debt facility. Upon closing, Diamond shareholders will own approximately 14.5 per cent of Noble's outstanding shares, Noble said, and a director from Diamond will be added to the Noble board.

<em>A Diamond Offshore Drilling rig (Photo: Diamond Offshore Drilling)</em>
A Diamond Offshore Drilling rig (Photo: Diamond Offshore Drilling)

The combined company will operate a total of 41 rigs, 28 floaters, and 13 jackups. Of that fleet, ten are Diamond rigs, all floaters: four being seventh generations drillships, three of which are working in the US Gulf of Mexico. There are also two DP semisubs, and three moored semisubs, one of which, Ocean Onyx, is stacked in Malaysia.

Diamond brings a backlog of over US$2 billion of contracted work to Noble, and had earlier sold the laid-up, 50-year-old semisub rig Ocean Monarch for scrap for US$7.5 million. Ahead of closing, it seems that Diamond will also scrap the laid-up, 1988-built semisub Ocean Valiant, which has been idle in the UK since 2020.

Being right and being wrong

We had long expected Diamond to be acquired. We wrote about it back in September 2022: "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."

Aquadrill had already fallen to Seadrill a few months later, in December 2022, in an all-stock deal that valued Aquadrill's equity at approximately US$958 million. Aquadrill's unitholders ended up owning 32 per cent of Seadrill after the deal.

Unfortunately, before we get too cocky, we should recall that we had predicted only three weeks before the Noble deal was announced that we expected the buyer of Diamond would be Seadrill. Whoops!

Consolidation play elevates Noble to number two

The deal consolidates the deepwater drilling market and positions Noble second only to Transocean in terms of floater fleet size. Valaris is now a distant third in in the deepwater segment with 18 floating rigs and Seadrill fourth with 14 drillships and semisubs, plus the two units it manages for the Angolan state oil company Sonangol. With deepwater rig rates now pushing through US$500,000 per day, and rig consultancy Esgian valuing ten-year-old drillships closer to US$400 million apiece, we can expect to see rates approach US$600,000 in 2025.

Noble's President and Chief Executive Officer, Robert Eifler, said in the press release announcing the deal that he expected to achieve US$100 million of "cost synergies," so we can expect a scythe to go through the ranks of Diamond's management. Given its history of successfully integrating both Pacific Drilling and Maersk Drilling in similar circumstances, we can expect Noble to move quickly in 2025 to achieve its targeted cost savings and redundancies.

Typically, the overhead associated with managing one drillship is around US$5 million to US$6 million per year. Since Diamond had a total general and administrative cost for the whole company in 2023 of US$72 million, we are not quite sure how the US$100 million figure was reached.

Pressure on the smaller players

Platinum Explorer <em>(Photo: Vantage Drilling)</em>
Platinum Explorer (Photo: Vantage Drilling)

The emergence of the Big Four drillers puts the pressure on the fragmented other players. Vantage Dilling has already sold 75 per cent of the drillship Tungsten Explorer to its client TotalEnergies, leaving it with just one drillship, the sixth-generation Platinum Explorer, and two jackups in its fleet.

Vantage is said to be considering a listing on the Oslo Stock Exchange, which would pave the way for either a sale, or its full take-over by the Saverys family's Exmar, which bought 11.5 per cent of Vantage in November 2023, as we reported. With Evangelos Marinakis owning platform supply vessels (PSVs), and John Fredriksen continuing as the largest shareholder in Northern Ocean, perhaps the Saverys family might join the ranks of traditional ocean shipping players riding the next offshore up-cycle?

Northern Ocean is the owner of the two high specification deepwater semisubs — Deepsea Bollsta and Deepsea Mira. The former has just come off-hire from Shell in Namibia, whilst the latter is on-hire to TotalEnergies in Congo, but is also due off-hire at the end of this year. Both units are managed by Odfjell Drilling, and we would not be surprised if some form of merger occurred.

<em>The drilship</em> Deep Value Driller <em>(Photo: Deep Value Driller)</em>
The drilship Deep Value Driller (Photo: Deep Value Driller)

Deep Value Driller in Norway is a completely speculative Norwegian player that owns one drillship, which it originally purchased for US$65 million and is on bareboat to Saipem. The company is listed in Oslo. The rig is also named Deep Value Driller, and is currently working in Ivory Coast under Saipem management for Saipem's parent, Italian state-controlled energy company Eni.

Interestingly, also last week, Eni sold a 10 per cent stake in Saipem, raising €393 million (US$422 million). Eni committed to not selling any additional Saipem shares on the market for 180 days unless waived by the investment banks organising the recent sale. This suggests that Saipem, which only recently returned to profitability after a disastrous 2022 profit warning, may need to be patient on Deep Value Driller, until it has fully rehabilitated its balance sheet.

New listing for Ventura in Oslo

<em>The drillship</em> Carolina <em>(Photo: Maersk H2S Safety Services)</em>
The drillship Carolina (Photo: Maersk H2S Safety Services)

The boom in offshore rig rates has spawned new listed companies as restructured entities seek to raise new funds on public markets, and create exit opportunities for the creditors that ended up owning them. Just last week, Brazil's Ventura Offshore Holding made its appearance with a listing on Euronext Growth Oslo.

Ventura had recently bought the Brazilian company Petroserv Marine, which has operated rigs in Brazil for 25 years. The company owns and operates the drillship Carolina and the semisubmersible rig SSV Victoria. It also manages the drillship Zonda and semisubmersible rig Catarina, both of which are owned by Norwegian speculators.

Eldorado Drilling bought the Samsung 12000 design rig, Zonda, from the yard in April 2023 for a price estimated by Esgian at US$200 million. The rig was originally ordered by Pacific Drilling in 2013, then cancelled in 2015, and subject to a massive arbitration claim which Pacific Drilling lost in 2020, just before it entered Chapter Eleven restructuring.

Earlier this year, Ventura raised US$170 million through a private placement. I would venture to suggest that Ventura would seem to be an ideal entity for the Norwegian owners behind Eldorado to cash out of their very much in the money investment in Zonda and in the seventh generation drillship Dorado, which they also bought from the shipyard Samsung Heavy Industries in 2023. Why else list a two-rig company in Norway?

Why did Diamond disappear?

Why has Diamond disappeared now? The company had enjoyed a long and storied history since its foundation in 1989, but its failure to survive should act as a salutary warning to other players in the offshore sector today.

Up until its bankruptcy in 2020, Diamond was publicly listed in New York, but controlled by Loewe's, the department store conglomerate that held 51 per cent of the shares. Loewe's treated Diamond as a cash cow through the last industry boom.

Unbelievably – and I had to check this figure myself because it seemed so implausible – between 2000 and 2015, Diamond paid out US$6 billion to its shareholders in cash dividends. Six billion dollars left the company into the pockets of shareholders as dividends, as the shareholders treated the business as a cash cow, generating over US$1 billion of free cash flow from operations every year in 2013, 2012, and 2011.

This was nice whilst it lasted, but by 2020, the company owed over US$2 billion, and cash flow from operations had run dry. Diamond couldn't service its debts and so it restructured, with the equity holders being wiped out and the creditors swapping their debt for shares in the company.

Ocean GreatWhite <em>(Photo: HD Hyundai Heavy Industries)</em>
Ocean GreatWhite (Photo: HD Hyundai Heavy Industries)

Most of the debt had been taken out to pay for the four seventh-generation drillships, the jewels in the fleet that Noble has now acquired, and another US$755 million on the newbuilding harsh-environment-capable Ocean GreatWhite, which was chartered by BP for a drilling campaign in the Great Australian Bight. This inaugural drilling campaign for the semisub was eventually cancelled after pressure from environmental activists and the impact of low oil prices.

Ironically, at the same time that it approved the Diamond take-over, Noble's board of directors approved a 25 per cent increase in their company's quarterly dividend to US$0.50 per share, starting with the dividend that is to be paid in the third quarter of 2024.

Old was gold, until it wasn't

The Diamond dividends were paid out to Loewe's, and Diamond borrowed to fund its very limited and very late newbuilding programme, which only saw its five newbuild rigs being delivered from the yard just as the market plunged into recession in 2014. In January 2014, Diamond had 30 floating rigs in service, but with an average age of over thirty years.

The company also owned seven jackups, but six of the seven were also over thirty years of age. Thus, when the downturn came, Diamond's vintage fleet was amongst the first to be idled by clients as old and inefficient, and then scrapped.

At the end of 2014, the company operated 39 rigs, so three quarters of the fleet has been scrapped in the last decade. By comparison, Noble operated 35 rigs at the end of 2014 and will have a larger fleet after the Diamond acquisition than it did then.

The lesson is clear – companies that fail to modernise and invest may throw off prodigious cash in the short term and may seem highly attractive to shareholders, but without fleet regeneration, they will ultimately fail. At the moment, nobody is building new floating or deepwater rigs. So long as that discipline holds, everyone in the drilling industry benefits.

Fleet renewal for all

The same is especially true for PSV operators. The industry leader, Tidewater, is milking the PSV market for all it is worth, just as Diamond did in the last boom. Tidewater's fleet of over 200 offshore support vessels is now over twelve years of age on average and the company will be raking in hundreds of millions in free cash flow this year and next. As is the case with Diamond, fleet renewal can be ignored for a long time, until suddenly, it can't be.

In what may be the ultimate red flag, Tidewater's CEO, the multimillionaire Quintin Kneen, announced the sale of another 367,000 shares last week (here and here) when his company's stock recovered to over US$100 per share after the Diamond and Noble deal was announced. These two sales on consecutive days appear to have netted him US$37 million in cash on top of the US$41 million that he made from the shares he sold in March and April, as we reported in May.

He's done very well, and Tidewater's shares have performed excellently since 2021, just as Diamond's did in the early years of the last market cycle. It remains to be seen whether Tidewater's shareholders will still be smiling in five or ten years. Offshore is a long-cycle business that also makes judgements on success and failure long cycle.

Likewise, Noble's CEO Robert Eifler has achieved three remarkable acquisitions since his own company emerged from Chapter Eleven in 2021. Let's see what happens next.

Background reading

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