COLUMN | Offshore is back: Keppel, Borr Drilling, Northern Ocean, Seatankers, Dolphin Drilling and Standard [Offshore Accounts]

We highlighted last week (here) that Middle Eastern demand is running red hot for jackups, and that prices have now passed the US$100 million per rig mark again. Thus, we confidently expect the final rigs abandoned at Keppel Offshore and Marine’s yards in Singapore, and at state-owned yards in China will finally make their way onto international markets.

That raises two obvious and important questions:

Question 1: When will Keppel come clean on its “Asset Co” owners?

The rise in the value of jack-up rigs potentially increases the pressure on Keppel to explain exactly who exactly owns the Asset Co, which acquired ten jackups from the company earlier this year, and a bunch of floaters (as we covered here). That deal had a value of close to US$3 billion (with a “b”), but it is shrouded in mystery, as Keppel never named the ultimate investors in the ASM Connaught House Fund V fund that controls the company that acquired the rigs. Nor did it make public the terms of the IOUs that were used by Asset Co to pay for the sixteen drilling units, nor the fees that Argyle Street Management receives for managing what were formerly Keppel’s own assets, nor which advisers received what payments for structuring the deal, and who paid those fees.

Keppel is a publicly listed company ultimately controlled by the Singapore sovereign wealth fund Temasek, which is also a 15.1 per cent minority shareholder in Asset Co. Keppel received US$3 billion of IOUs and securities for the rigs and a ten per cent share in the Asset Co, which it valued at nothing when it reported the deal (here). Keppel effectively handed Asset Co’s billions of dollars of rigs with no cash paid upfront, so some disclosure over the terms of the IOUs it received in return, like the tenure and the interest rates applicable, might be considered fair disclosure.

In an interview with America’s PBS in 2001, Singapore’s current prime minister Lee Hsien Loong was very keen to stress the importance of corporate transparency (here).

“It’s an all-or-nothing business,” said PM Lee. “You can’t be slightly transparent. You have to be of that world standard.”

Maybe PM Lee should have a word with Temasek and Keppel regarding corporate transparency with respect to the Asset Co? Selling US$3 billion in state-owned assets to a buyer controlled by unknown funds in an offshore tax haven is certainly not “world standard” transparency…

…so says the anonymous columnist.

Question 2: What does the boom mean for Borr Drilling?

We have covered the travails of Borr Drilling extensively (here and here). The company has been one of Keppel’s biggest customers. The rise in jackup prices helps bring Borr closer to a sustainable future. Even a price tag of US$100 million per jackup doesn’t really help Borr, a company with a fleet of twenty-something jackups, but a debt pile of close to US$2 billion. But there is hope, at last.

On August 17, Borr announced the first settlement of its previously announced US public offering of 69,444,444 US common shares of the company, at a price per share of US$3.60 per common share for total gross proceeds of US$250 million. The fact that Borr was able to raise so much capital, and that its shares bounced up to US$4.10 last Friday, shows us that investors finally trust drilling companies again, after seven years in the wilderness.

Investors are stampeding back

Borr is not alone. Investor cash is finally returning to offshore, after years of being shunned. Asset prices have doubled in a year, as demonstrated by Icon Offshore’s successful flip of the jackup Perisai Pacific 101 to ADES, where Icon made US$100,000 per day just by holding on to the rig and then selling it to ADES.

Finally, we now see money being raised for new projects, rather than creditors foreclosing on assets and Chapter Eleven filings amongst the drillers and supply vessel operators.

Fire sales and forced scrappings have been replaced by fundraising for strategic investments and vessel purchases.

Northern Ocean raises cash from John Fredriksen for Namibian reactivation

On August 25, Northern Ocean, the company that is more than 40 per cent controlled by Norwegian magnate John Fredriksen, announced some good news. Northern Ocean and its parent Northern Drilling have spent four years trying to catch a falling knife by investing in, and sometimes cancelling contracts for, abandoned deepwater rigs at Korean yards (here).

Northern has won a contract from Shell for its DP semisub Deepsea Bollsta for work off Namibia for twelve months plus a six-month option to extend, starting in December. It says that the Shell contract adds approximately US$124 million of its firm revenue backlog (excluding options), equating to a day rate of around US$340,000. Not bad when considering that in 2021, similar rigs were being chartered for just over half that rate.

Namibia is the latest hot oilfield province following TotalEnergies’ billion barrel find with its Venus wells (here) and Shell’s success in the Orange Basin with its Graff well (here).

Success requires investment

Odfjell Drilling, the operations manager of Deepsea Bollsta, has commenced reactivation activities and mobilisation preparation for the Shell contract. But unfortunately, such a reactivation costs money, so on August 25, Northern announced its intention to carry out a private placement of approximately US$40 million for funding the reactivation of Deepsea Bollsta, increasing working capital, and other general corporate purposes.

Hemen Holdings made an unsuccessful offer to acquire all of Northern Ocean’s parent company Northern Drilling in March. Mr Fredriksen has also built up a considerable stake in Valaris, and by July, he owned 7.2 per cent of the company’s stock (here), worth around US$280 million now.

PSVs on Fredriksen’s horizon as well

In August, Fredriksen’s Seatankers increased its exposure to the supply vessel market as well. Seatankers acquired two PSVs from Remoy Shipping. Broker Fearnley reported that the vessels in question are Rem Hrist and Rem Mist, both DP2, 2011-built Ulstein PX105 design ships, boasting 916 square metres of clear deck space and equipped with battery packages.

As recently as early March this year, Seatankers had been sellers of PSVs, disposing of the 4,900DWT Sea Hornbill, which became CBO Wiser upon its acquisition by the Brazilian operator Grupo CBO. The sale was Seatankers’ second to CBO. CBO had previously bought the sister vessel CBO Energy (ex-Sea Heron) in 2021. The pair were originally ordered by Nam Cheong International way back in 2013 for US$31 million each and were sold by the yard to Seatankers in 2018 for US$19 million each, along with two sister vessels, which Seatankers retains.

Seatankers is also reported to have purchased the abandoned 800-passenger DP monohull Edda Fortis, which Eidesvik had abandoned in a Korean shipyard in 2015. This laid-up, high-specification accommodation unit cost Mr Fredriksen over US$80 million, if broker banter is correct.

Industry leader Prosafe reported EBIDTA from its fleet of seven mainly DP3 floatels of US$23 million in the second quarter, and at 81 per cent, the company’s utilisation hit the highest level since 2015. So, Seatankers looks to have found a segment with momentum for an asset play. With long-term debt of US$421 million and two newbuilding accommodation units sitting in a Chinese shipyard under a deferred delivery agreement with Cosco, Prosafe isn’t in much of a position to stop him.

Friends with benefits?

Fredriksen has clearly changed his opinion on the direction of the offshore industry. Who can argue with a man whose daughters were named the richest heirs in all of Norway by Kapital magazine?

Well, Live Drønen writing in Norway’s Kunstkritikk Magazine could, pointing out that both Fredriksen and the former CEO of Seadrill, Tor Olav Trøim (who is now Chairman of Borr Drilling), were awarded Russia’s Order of Friendship by no less a person than Russian President Vladimir Putin in 2015 after the illegal annexation of Crimea (here). Drønen is not happy with the Fredriksen family’s ethics.

No comment.

Dolphin Drilling goes for an IPO… in two, and one?

Further evidence of the invest-ability of offshore and the return of laid-up rigs back to work emerged from the proposed listing of Dolphin Drilling on the Euronext market, which was announced on September 1 (here).

Dolphin is currently owned by a mix of private equity and 32.5 per cent by Norwegian tycoon Oystein Stray Spetalen and his partner Martin Nes’ Standard ELO (the company formerly known as S. D. Standard Drilling). Standard says that Dolphin has recently been re-structured and has no interest-bearing debt. Standard bought a 25 per cent stake for just US$10 million in May, along with warrants to buy the additional 7.5 per cent for US$5 million.

Dolphin owns three harsh-environment moored semisubmersibles, which have been rebuilt with fifth/sixth generation topsides. The company said it has received a letter of award for the rig Blackford Dolphin from an unnamed client in Nigeria at US$232,500 per day, plus a mobilisation fee of US$12 million commencing late 2022.

Private placement raises US$45 million

Last week, Dolphin sold more shares in a private placement raising gross proceeds of US$45 million, up from the expected US$40 million it had planned to raise when its bankers approached institutional investors in Norway. The rig owner is now targeting a listing of its shares on Euronext Growth and expects to have its shares traded on or about September 13, 2022. It says that it wants to raise cash to prepare the rig for the Nigerian contract, and to take, “the opportunity to acquire and/or manage two latest generation, harsh-environment semisubmersibles as well as to manage and operate non-owned rigs provide attractive additional growth opportunities.”

Who might own two such latest generations harsh-environment rigs that are for sale? Oh! That would be Keppel’s Asset Co, which took possession of the rigs Awilco walked away from amid legal acrimony in 2021 (here).

Standard Supply lists and raises more cash, buys PSVs

Oystein Stray Spetalen’s Standard Supply also managed a listing on the Euronext stock market early last month to spin off from Standard ELO. The company owns a fleet of nine PSVs; four wholly-owned vessels and five medium-sized units in which it holds a 51 per cent ownership interest through subsidiary Northern Supply.

Ahead of the listing, Standard Supply raised NOK150 million (US$15 million) through a private placement, which it then spent on buying two of its PSVs. The company bought the soon to be renamed Standard Defender (built in 2019, DP2, 4,200DWT, 900 square metres of clear deck) for NOK204 million (US$20.7 million) from Island Offshore, with delivery expected when the vessel is charter-free next month. The PSV is currently named Island Defender and specifications are here.

Standard Supply also purchased the laid-up 2012-built PSV Highland Duke from Tidewater for around US$5 million. The 3,100DWT ship, which will be renamed Standard Duke, has been laid up in Sunderland in the UK since 2016. The boat will be reactivated and dry-docked at an estimated cost of US$2 million, according to Standard. Its AIS remains inactive at the moment, however.

Parent company Standard ETC has also arranged for a US$20 million revolving credit facility to support Standard Supply’s fleet expansion.

Spetalen and Nes move from buyers to sellers to buyers again

Like Fredriksen, Oystein Stray Spetalen appears to have taken a sharp U-turn in his attitude to offshore. For years, Standard Supply had been treading water, selling offshore vessels as it struggled to stay afloat. In late 2021, Standard Drilling (as it was called then) agreed to sell the 2008-built PSV Standard Princess for US$10.3 million. That came on the back of the sale of the 2014-built PSV Standard Olympus for US$7.5 million in June last year to fish farming interests. At the end of 2019, the company had also sold the PSV Standard Supporter for US$15 million to Grupo CBO of Brazil, and in October 2019, it had offloaded the PSV Standard Provider for US$13.5 million.

Northern Supply has shrunk in recent years as well, even as Nes and Spetalen have increased Standard’s stake in the company from 26 per cent in 2017 (here) to 51 per cent. Northern sold the medium size UT 755 LN design PSVs FS Carrick and FS Aberdour for US$6.6 million in early 2021 in lay-up.

A whole New World: sold!

New World Supply, in which Standard held a 34.4 percent shareholding, exited ship-owning in 2019 when it sold its remaining four distinctive bright yellow-livery, medium-sized 3,500DWT Damen-built PSVs World Diamond, World Peridot, World Pearl and World Opal to German owner Borealis. These units are now managed by Aurora Offshore in Norway.

All four units were built in 2013 in Romania, delivered just as the market crashed, and had been in long-term lay-up in Norway since 2016. New World had purchased them from bankruptcy for US$5.1 million apiece. In 2018, New World sold the sister vessels World Sapphire and World Emerald out of lay-up in Spain to Opielok Ocean Carriers.

Once a flipper, always a flipper?

One can’t help but feel that Mr Nes and Mr Spetalen might have profited more simply by being patient, rather than conducting this frenetic wave of deal making. But deal making is in their blood. In the last boom, Standard made a fortune by ordering seven KFELS Mod V-B jack-ups and re-selling them before delivery for a 55 per cent average annualised return.

But over the company’s twelve-year life since its inception in 2010, its returns have been lacklustre, with US$467 million returned in cash to shareholderswho had invested US$440 million.

But now that the up-cycle has begun again, watch them flip again.

Tidewater raises cash to pay Swire Pacific

But Oystein Stray Spetalen isn’t the only one lacking patience.

When Hong Kong’s Swire Pacific sold its fleet of fifty offshore support vessels (OSVs) to Tidewater in early March for the bargain price of US$190 million, a price that we reckoned was half the value of the fleet (here), there was one small catch. Just one.

Swire barely received any cash for its high-quality fleet of modern PSVs and AHTS, a mere US$42 million. The rest of the purchase was paid for with pieces of paper, 8.1 million so-called “Jones Act warrants” that entitle the bearer to buy Tidewater shares, but which are not Tidewater shares, because otherwise the company would risk its status as an American shipowner under our favourite protectionist piece of cabotage legislation known as the Jones Act.

So, would Swire Pacific be a patient long-term investor looking to benefit from the long-term appreciation of value from the offshore assets it sold, by holding onto the warrants?

Er, no. After its airline, Cathay Pacific, reported another loss of US$637 million in the first half of the year, Swire ran for the door.

Warrants redeemed as airline burns more cash

Tidewater announced here that it was offering of 3,520,000 shares of its common stock at a public offering price of US$17.85 per share in August. The gross proceeds from the offering, before deducting underwriting discounts and the usual blah blah blah, were expected to be approximately US$62.8 million. In addition, Tidewater granted the underwriter a 30-day option to purchase up to an additional 528,000 shares of its common stock at the public offering price, less the customary underwriting discounts.

The cash will be used to buy a third of the outstanding warrants from Swire. It’s a neat solution for Tidewater, avoiding a flood of its stock swamping the market, but allowing Swire to get one third of the cash it failed to collect when it handed over the vessels and its hapless former employees into the care of the American owner.

Two more similar exercises and Swire will have swapped its pieces of paper for the cold hard US dollars it needs to revive its flagging airline and to withstand falling Hong Kong and mainland Chinese property prices.

Unfortunately for Swire, its two core businesses in Asia face turbulent times at the same time, just as the offshore business it sold for pennies rises once more like a phoenix.

Offshore is back.

Background reading

Northern Ocean’s financials are here. The company is listed in Norway and should not be confused with Northern Offshore, which owns four jackup rigs working in the Gulf on long term charter, three of which are in Qatar (here). That Northern Offshore is controlled by Shandong Offshore Equipment Company and must surely be another tempting consolidation target for Qatari interests, if the price is right.

For discussion of Standard ELO/Standard Drilling’s corporate governance, read this letter from its former director from last year.

Last week, we mentioned that Abu Dhabi’s state oil company ADNOC was splurging investment on companies owned by the Abu Dhabi state (here). The same day the article was published, state-owned National Petroleum Construction Company won a US$548 million engineering, procurement, and construction contract from ADNOC to lay a new main gas pipeline to Das Island from Lower Zakum Field, and construct associated an associated platform and gas receiving station – ADNOC press release here.

Strange that!