COLUMN | Maersk/Noble: Danish retreat from oil and gas raises bigger questions [Offshore Accounts]

On November 10, drilling giants Noble Corporation and Maersk Drilling announced their merger (here). The new company will own 20 floaters and 19 jackups. Each company’s shareholders will share half of a newly created parent company, to be called Noble Corporation. This gives the A. P. Moller Maersk Group approximately 21 per cent of the share capital and votes in the new company. In addition, certain foundations related to the Maersk Group parent will own another approximately six per cent of the share capital. “Legacy” Noble directors hold three seats on the board, with three from Maersk Drilling, and the casting vote held by the CEO. The new company will be listed in both New York and Copenhagen.

But whilst the merger appears to be of equals, the new entity will be headquartered in Houston, Texas, Noble’s chairman, Chuck Sledge, will be the chairman of the combined company, and Noble’s CEO Robert Eifler will be the CEO of the new company. When Noble boasts that the merger will result in an “estimated US$125 million of run-rate annual cost synergies within two years,” it is clear that many of the savings will come from closing Maersk Drilling’s headquarters in Denmark and removing headcount from the legacy Maersk organisation.

Clear industrial logic

The Maersk/Noble merger has clear industrial logic. It continues the consolidation of the deepwater drilling market. In March, Noble announced an all-share merger with Pacific Drilling after that company emerged from its second Chapter Eleven bankruptcy in January. Noble snapped up Pacific Drilling’s fleet of seven deepwater drillships, and promptly announced that it would scrap (“dispose of”) the 2010-built drillship Pacific Bora and its 2011-built sister Pacific Mistral expeditiously.

The combination with Maersk creates the youngest and highest specification fleet in the industry, Noble claims, with an average rig age of just ten years. On day one it will boast more rigs on hire (32) than any of its competitors, including Transocean, Diamond, Valaris, Borr, and Seadrill, with one additional rig contracted for a future job. With just three warm stacked rigs and three cold stacked rigs, the merged Maersk/Noble entity is really a bet on rig rates rising, rather than utilisation.

The two components of the new company held combined net debt of US$601 million at the end of the last quarter, and Noble forecasts it may be able to achieve free cash flow from operations of US$357 million per year from 2023 onwards.

If you think oil and gas is dying, the economics of new Noble suggest you are wrong. It’s restructured and it is back for the long haul.

Guyana and Suriname at the heart of it

The area where the merged entity is strongest is the area that is currently the focus of intense drilling activity: offshore Guyana and Suriname. Noble has contracted four deepwater drillships in Guyana to ExxonMobil, including Noble Tom Madden, which will be on hire with the supermajor until January 2027. In addition, Noble recently signed a deal with APA Corp’s subsidiary Apache in Suriname for one firm well and two well options using the 2011-built drillship Noble Gerry De Souza (former Pacific Santa Ana).

Maersk is chartering the deepwater floaters Maersk Valiant and Maersk Developer in Suriname for operator TotalEnergies and its partner Apache, whilst CGX Resources has exercised an option to drill one additional exploration well offshore Guyana using Maersk Discoverer in 2022, on top of the well it drilled for CGX this year.

Five of the seven units are fitted with dual blow-out preventers, making them well suited to the high technical requirements of the client base there.

With SBM announcing a fourth FPSO contract with ExxonMobil in Guyana just last week (here), the drilling volumes for both exploration and development in the Suriname-Guyana basin are looking great for the rest of the decade. By 2030, Guyana and Suriname may be rivalling the UK in terms of total oil output.

Maersk turns away from oil and gas

Maersk Drilling had been spun out of the parent company in 2016, as part of a wide-ranging divestment from oil and gas by the Danish shipping conglomerate to focus on its core container shipping and terminals businesses. In 2015 Maersk sold North Sea emergency response and standby vessel player Esvagt to private equity companies 3i Infrastructure and AMP Capital for US$610 million.

In 2017 it sold all of Maersk Oil to TotalEnergies. This deal saw Maersk dispose of reserves of around one billion barrels of oil equivalent, and daily production of about 160,000 barrels of oil equivalent per day (boe/d) estimated in 2018.

Under the agreed terms, A.P. Moller-Maersk received US$4.95 billion in Total shares (around 97.5 million shares based on average share price of the 20 business days prior the signing date of the 21st of August 2017), and Total took US$2.5 billion of Maersk Oil’s debt onto its balance sheet.

Goodbye, natural hedge

This was a major step towards Maersk becoming a pureplay logistics giant, but removed a natural hedge from its container business. Previously, when oil prices were high, the squeezed margins at Maersk’s container lines were offset by higher profits at Maersk Oil and its related services firms like Maersk Drilling.

It may surprise readers that in 2013 and 2014 Maersk Oil made higher profits than the group’s massive port and terminals business (see 2014 presentation here), and even Maersk Drilling’s 21 drilling rigs made annual profits equal to more than 600,000 TEUs of Maersk Line’s container vessels then.

Maersk is not decarbonised yet

Make no mistake: whilst Maersk has ordered eight 16,000TEU container vessels at Hyundai Heavy Industries to be powered by “carbon neutral” e-methanol (here), the first of these ships will only deliver in 2024. In the meantime, the company will be operating at least four million TEUs of container capacity running on conventional fossil-fuel bunkers, including heavy fuel oil. The new carbon neutral vessels will account for around three per cent of Maersk’s fleet capacity when they deliver in 2024.

Maersk is moving towards decarbonisation, but it is very exposed to higher hydrocarbon prices for bunkers for the next decade at least. The spiking container profits of 2021 are likely to mark the high point of container industry profitability as port congestion likely eases next year, inflation dampens demand in the developed world, and shipowners bring new tonnage to the market to meet demand.

Maersk is still very exposed to volatile oil prices. Disposing of Maersk Drilling increases this risk.

What about Maersk Supply Service?

The second strategic challenge from the spin-off of Maersk Drilling is where that sale leaves Maersk Supply Service. The operator of over forty anchor handlers and subsea vessels is effectively now a legacy, stranded asset within Maersk, the last remaining oil and gas business in the portfolio that the parent has pledged to “decarbonise”.

Maersk Supply is now categorised ominously in the “Other” category in the Maersk group results, and whilst its management talk a good talk about reducing its carbon emissions, it is clearly an orphan. Floating wind, often touted as its future green business line, is developing only slowly even in Europe, and is unlikely to see significant charter coverage until the second half of the decade. The ocean clean-up of the Great Pacific Garbage patch with Maersk Supply’s anchor handlers is wonderful public relations, but not an economic business. And Maersk’s controversial involvement with The Metals Company in the subsea mining space involves just a one vessel commitment at the moment.

Decom decommissioned?

The merger of Maersk Drilling with Noble leaves question marks over the Maersk Decom business, set up as a fifty/fifty joint venture between Maersk Supply and Maersk Drilling in 2018. When both companies were part of the Maersk family, there was a logic to share rigs and boats on projects like the decommissioning of Tullow’s Tiof and Banda fields off Mauritania (here).

Now, it’s not so clear how the economics, the project management and the risks and rewards of this decommissioning joint venture will be shared between Maersk Supply and Noble. It might not be offshore wells and structures that are plugged and abandoned after the merger.

Another “for sale” sign in Copenhagen

As Oliver Twist discovered, life as an orphan can be hard (here), and Maersk Supply is unlikely to be getting any more investment from its institutional owner.

However, there are options. Maersk Supply’s COO Mark Handlin was previously at Tidewater, and flush with a US$175 million refinancing announced last week, Tidewater is strengthening its balance sheet (here). Tidewater’s CEO Quintin Kneen was already publicising his desire for a transformative merger to consolidate the OSV industry last year (see our coverage of his 2020 interview with KPMG here).

The Maersk Group has made it clear that it is open to consolidation for its legacy oil and gas assets. Maersk Supply and Tidewater would make a great fit in terms of geography and fleet. Tidewater could pay with cash and shares, copy Noble by reducing head office duplication costs, and assist Maersk Supply’s entry into Norway.

If Tidewater passes, then my money would be on private equity snapping up Maersk Supply.

Maersk Drilling has led where Maersk Supply will inevitably follow.

Noble/Maersk leaves Diamond and Borr isolated

The union of Noble and Maersk leaves two players especially exposed: Borr Drilling and Diamond Offshore are now very exposed from a scale point of view, as there are now four players that each now own more than thirty modern rigs apiece: Noble/Maersk, Transocean, Valaris, and Seadrill.

In the short term they may be able to shelter under the pricing umbrella afforded by their larger rivals. High rig rates will benefit the whole industry. It is clear that rates for modern deepwater rigs have now smashed through the US$200,000 per day barrier and are pushing towards US$300,000 now. Hold onto your hats for higher prices across the entire offshore sector.

Unfortunately, we have already covered (here) how Borr simply has too much debt and will struggle to compete against its bigger, leaner  rivals. Its toxic debt load means no one will want to buy it, and its strained balance sheet means that it cannot buy any of its rivals.

Borr is stuck.

Diamond’s bankruptcy cost it US$100 million in fees

Diamond, on the other hand, would make a very attractive acquisition candidate, as it has restructured and now owes just US$306 million in long-term debt secured against a fleet of 13 owned offshore drilling rigs. The Diamond fleet consists of nine semisubmersibles and four dynamically positioned drillships.

Last month, Diamond announced a new CEO, Bernie Wolford, formerly of Pacific Drilling (here) – just ahead of Seadrill announcing that Diamond’s former CEO Julie Robertson would become its new chairperson (here). You can read its last quarterly results here – Diamond reported a net loss of US$52 million.

The notes to the accounts reveal that, as we saw with McDermott, a bankruptcy filing can be devastating for shareholders and employees, but benefits lawyers, bankers and consultants big time.

Diamond reported “payments of US$35.4 million, US$37.6 million and US$23.8 million related to professional fees have been presented as cash outflows from operating activities in our unaudited Condensed Consolidated Statements of Cash Flows for the period from April 24 to September 30, 2021, the period from January 1 to April 23, 2021 and for the nine months ended September 30, 2020, respectively.”

The bankruptcy cost just shy of US$100 million! In a world with four players owning over thirty rigs each, Diamond with 13 rigs lacks scale now that its mid-size rivals Maersk Drilling and Pacific Drilling have been consolidated into Noble.

Diamond has marketing rights over three former Seadrill Partners rigs now owned by Aquadrill. But I fear it is too little, and too late from its restructuring.

The rig market is moving again, speculators are moving

The Maersk Drilling/Noble merger tells us that the worst is over for the drillers. The Maersk Group can claim it has disposed of its penultimate oil and gas business successfully. Noble boss Robert Eifler has pulled off an audacious three-way consolidation.

Rates are rising. Abandoned rigs are being snapped up from the Korean yards. Saipem took delivery of the seventh-generation drillship Santorini from Samsung Heavy Industries last week, which had been abandoned by Transocean after the Ocean Rig purchase.

Turkish state player takes a fourth

The Turkish media reported here that the Turkish state energy company TPAO has finally bought the seventh-generation drillship Cobalt Explorer from DSME in Korea to join its fleet of three drillships. The unit was originally ordered by Vantage Drilling, with delivery scheduled for 2015, but when the market crashed that year, the contract was cancelled.

As we reported in our popular “Britney Spears” column this summer (here), John Fredriksen’s Northern Drilling signed a contract on the unit for US$350 million, renaming it West Cobalt, but then quickly cancelled the contract in 2019, claiming breach by DSME.

The fact that TPAO has now purchased the drillship is more than just third time lucky for DSME. It shows that confidence and demand is rising in deepwater.

Norwegians seek Deep Value

Another indicator of industry confidence is the return of Norwegian speculators, our favourite crowd. TPAO had previously tried to buy the 2014-built drillship Bolette Dolphin from the creditors of Dolphin Drilling this year. TPAO failed, as Norwegian speculators Deep Value Driller purchased the unit for US$65 million, according to market reports here.

Deep Value Driller is listed in Oslo and is headed by Svend Anton Maier, the former Chief Executive Officer of Borr Drilling. Having recycled their oldest, laid-up rigs, the drillers are now busy recycling veteran executives and hoping to flip assets.

The up-cycle is beginning again. Maersk and Noble’s merger is only the start.

Background Reading

Our September 2021 coverage on Suriname and Guyana shows the great potential the region holds for Noble here.

We covered Esvagt’s private equity ownership here.

For more background on The Metals Company charters for Maersk, see here.

Deep Value Driller’s website is here.