COLUMN | Rescue Remedy? Shelf and Noble; Saipem and BW Energy; Borr Drilling and the nameless one; Lamprell on the rocks [Offshore Accounts]

For over eighty years, stressed English ladies, and the occasional offshore supply vessel master, have sworn by the power of Rescue Remedy, a patented concoction of five floral essences that they spray around or rub into their temples to provide comfort in times of emotional demand.

Remedies have made the headlines in offshore this week, too, but rather than spritzing themselves with lavender oil, several major players have been splashing the cash as they seek to overcome all manner of stress and strife.

Remedy Number One: Noble sells five rigs to Shelf Drilling

When Noble Energy announced that it would be merging with Maersk Drilling (here), everyone seemed to be happy – the controlling Danish shareholder of Maersk Drilling would no longer be tainted by direct exposure to dirty oil and gas drilling, the shareholders of Noble acquired a fleet of modern high-quality rigs, and the management of the combined entity saw ample scope for synergy and cost savings when the two companies were united.

Everyone was happy, except the British competition regulator, which feared that the merger of the owners of two of the largest fleets of harsh environment jackup rigs in the North Sea might lead to higher prices for those poor oil companies they serve. This ignores the fact that the oil companies are usually far larger in terms of size than their drilling contractors, and that for six years the drilling contractors have bled cash, scrapped rigs, and laid off thousands of employees. But in order to approve the deal, the Competition and Markets Authority (CMA) said that Noble must sell five of its rigs so that competition wasn’t restricted. These were promptly branded the “remedy rigs”.

Last week, Noble announced that it had found a buyer (here): Shelf Drilling 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 offshore crew working on those rigs and the shore support teams would also transfer across to Shelf with the quintet of drilling units, giving Shelf an instant North Sea business it had never before had. Lucky Shelf.

Following the acquisition, Noble expects that Noble Lloyd Noble will continue its current drilling programme under a bareboat charter arrangement with Shelf. Shelf would charter the rig to Noble and Noble’s drilling crew would continue to operate the unit that contract runs out in the second quarter of next year.

Gripes from the sidelines

Analyst Henrik Alex of Seekingalpha is not a fan of the sale of the remedy rigs, as he points out here.

“While both Noble and Maersk Drilling have been quite clear about their belief in the financial and strategic rationale underpinning the transaction remaining intact and compelling for all stakeholders irrespective of the required divestment of the majority of Noble’s jackup rigs,” writes Mr Alex, “I am very disappointed by the terms of the proposed transaction… Frankly speaking, I would have preferred Noble to avoid this fire sale and rather terminate the merger with Maersk Drilling…”

His gripe is that the sale of the remedy rigs means that Shelf Drilling not only gets five modern jackups at a bargain price, but these rigs come with an estimated US$250 million in contract backlog – future revenue for work that they have been awarded but have not yet executed. Indeed, Noble Houston Colbert was recently was awarded a three and a half year contract offshore Qatar.

Additionally, Noble Lloyd Noble is among the largest and highest-specification jackup rigs in the world, and Infield estimated that it cost almost US$700 million when it delivered just six years ago from Jurong Shipyard in Singapore (here).

The UK antitrust watchdog has not yet approved the Maersk Drilling/Noble merger, but is expected to approve it now that Shelf has signed for the five remedy rigs. In addition, completion of the merger remains subject to acceptance by holders of at least 80 per cent of Maersk Drilling shares. But here, Maersk Drilling’s largest shareholder, A. P. Moller, has already signalled its approval for the deal. So, the merger should go ahead, albeit with a much smaller fleet than when pairing was originally announced.

What about Shelf?

When Shelf announced the plan, my first thought was to wonder how on earth the company would pay for the five Noble rigs. Shelf’s most recent results announcement from May (here) showed that the company is burdened with US$980 million of debt, and that it made a net loss of US$4.6 million for the first quarter, as it has consistently since 2016.

Shelf has been trying to modernise its fleet, and in mid-June also announced that it would be buying the jackup Deep Driller 7 from beleaguered Indian drilling player Aban Offshore for US$30 million (here), putting further strain on its finances – most of Shelf’s free cash flow goes into servicing the US$26 million of quarterly interest payments. Deep Driller 7 was built in 2008 and is of Baker Marine Pacific Class 375 design, currently located in the United Arab Emirates. Shelf will be paying for the unit from its cash in hand. The sale follows Aban’s mass divestment of other rigs to Middle Eastern players ADES and Adnoc Drilling, including Deep Driller 8, which went to Adnoc for US$28 million last month.

But such is the renewed investor interest in oil and gas in Norway that Shelf was able to raise a total of NOK1.3 billion (around US$130 million) by selling 38 million new shares in itself for US$50 million and by raising US$80 million for a 40 per cent stake in a special purpose company to own the five rigs, a special purpose company in which Shelf itself would hold the remaining 60 per cent.

It was something of a gamble for Shelf, as it had paid a deposit of US$37.5 million to Noble from Shelf’s cash on hand, which is not repayable in case the remedy rig purchase fails, or Shelf could not secure financing.

However, you will have noted that US$130 million plus US$37.5 million does not equal the US$375 million price tag for the rigs. So, Shelf also intends to raise between US$200 and US$225 million in new debt, secured against the rigs. The fact that investors will even consider funding a US$375 million rig purchase with new debt and new equity in Shelf shows that attitudes have been transformed now oil is back over US$100 per barrel.

Two years ago, if you had said that Shelf would be able to raise over US$300 million in debt and equity, people would have laughed. I would have done, but the market’s turned.

Remedy Number Two: Saipem sells FPSO to BW Energy

We noted last week, that like Yinson and Shelf Drilling, Saipem had also gone to its shareholders to raise additional capital to set its finances in order (here). That came on top of the company’s earlier decision to offload its land drilling business to KCA Deutag (here).

Now Saipem has announced another asset is being sold (here). Saipem has signed a Memorandum of Agreement for the sale of the floating production storage and offloading unit (FPSO) Cidade de Vitoria to BW Energy. The FPSO is currently chartered to Petrobras in the Golfinho field offshore Brazil, but Petrobras is in the process of divesting its smaller and older fields as it attempts to ramp up the mammoth Buzios field to produce two billion barrels of crude a day by 2030 (as we reported here). If you want to buy a mature oilfield from a careful state-run operator, you need to have a chat with Petrobras in Rio.

BW Energy has been having those conversations with whoever is running Petrobras this week – Petrobras’s most recent CEO lasted only two months in the job. BW is looking at buying Petrobras’ 100 per cent operating working interest in the Golfinho field. And the sale of the Saipem FPSO is contingent on BW closing the purchase of the field from Petrobras, which is expected to occur in the first quarter 2023.

Under the agreement, BW Energy will pay Saipem US$73 million, with US$25 million due at the time BW acquires the Golfinho block, US$13 million due at FPSO takeover and customs clearance, expected in 2023, and the final US$35 million will be paid in 18 monthly instalments following the takeover. In the meantime, the charter of the FPSO has been extended by Petrobras up until the time it sells the field, or until June 2024, whichever comes first.

More DIY from BW Energy

This is a good deal for both parties – and indeed for Petrobras. We have already covered how BW Energy has been pursuing a unique “do it yourself” strategy to develop smaller, marginal fields with its own production units (here). Indeed, we reported (here) how BW Energy entered into an agreement to buy the FPSO Polvo from sister company BW Offshore for US$50 million in April. That unit had recently ended its charter on the Polvo field in Brazil and is currently in lay-up in Dubai. BW Energy plans to redeploy that FPSO on the Maromba field offshore Brazil.

BW Energy plans to follow a phased scheme to minimise up-front capital spending for Maromba and to fast track first oil, and then build up production volumes in later stages, a strategy it has followed with great success on the Dussafu license offshore Gabon, where BW Energy began production using an FPSO it acquired from BW Offshore. In late 2020, BW Energy announced that it was buying two jackup drilling rigs, the 2003-built sister-units Atla and Balder, from Borr Drilling, to convert for use as mobile production facilities on a satellite field in the Dussafu license.

Drilling on that satellite reservoir is believed to commence later this year and BW has contracted Borr’s jackup Norve, supported by the PSV Pacific Griffin and AHTS Hermit Baron.

Remedy Number Three: Borr’s dash for cash

Like Saipem, Borr is a company that has faced serious financial issues.

For years we have been preaching that Borr has an unsustainable debt load, bad contracts in Mexico, and an overvalued fleet. The company’s last results announced (here) on May 31 were grim – Borr lost US$51 million in the three months to March 31, and had US$59.7 million of bills outstanding from its troubled joint ventures in Mexico, where state oil company Pemex has proved a slow payer. Borr raised US$34 million in fresh capital through selling new shares, but then promptly burned through US$14.7 million of it, as its operations remained cash flow negative, and it had to pay US$7.1 million in regular quarterly interest payments to his patient lenders.

Now it appears that the market recovery is gradually rescuing even this turkey of a company, but once again shareholders will have to dip into their pockets to provide additional capital. But that should be no surprise to anyone who has been following this highly speculative venture.

Trio of rigs on the block

In a flurry of announcements last week, the pathway to Borr’s survival becomes clearer. The company has announced (here) that it is selling three of the five newbuild jackups that it has been holding at Keppel FELS in Singapore, pending delayed delivery in 2023. Borr has now signed a binding letter of intent with an undisclosed buyer for the three rigs Tivar, Huldra, and Heidrun, for a total of US$320 million. The company did not name the buyer, and we won’t speculate on the identity of the nameless one. Borr will retain the two other slightly smaller jackups that are also under construction at Keppel FELS ready to deliver when Borr fronts up the cash next year. Borr was pushed into action by Keppel, which had said it has found an alternative buyer for two of the rigs for US$100 million each.

The influx of US$320 million will be used to pay the delivery instalments of the three rigs, and means that Borr will not have to pay the associated activation costs to get the mothballed newbuilds back in service. In the last quarter, Borr said that rig activation payments to get the jackups Thor and Groa into service cost it around US$7 million.

Covenants waived as lenders try to agree

Progress with the rig sales and the improving drilling market means that Borr’s lenders are now moving to reach an agreement to restructure the company’s debt. Covenant waivers have been extended until July 15 by the lenders in Borr’s bank syndicate, so that all the creditors can agree the restructuring. Borr reported last Thursday that it had agreed terms in principle for the refinancing of the senior secured bank facility in July 2022, to be funded with a mix of a new credit facility and equity or an asset sale.

After the sale of the three newbuild rigs, Borr’s fleet will consist of 23 working rigs in service (of which 20 are currently contracted), and the final two rigs under construction at Keppel FELS. Borr’s CEO Patrick Schorn told investors he was confident in his “ambition of having all 23 delivered rigs contracted by the end of 2022, benefiting from the fast-improving jackup market.”

Maybe, but I suspect that by the year end, further asset sales to take advantage of higher rig prices in the second-hand market may leave Borr a smaller company than Mr Schorn hoped. The lenders are tired of Borr’s promises and they want cash. If Borr can finally generate cash from operations, perhaps the long-suffering shareholders might also be on the road to remedy, too.

Remedy Number Four: Lamprell turns to Blofeld

Fans of James Bond will recall that Ernst Stavro Blofeld is Agent 007’s arch-enemy, a criminal mastermind with aspirations of world domination through his nefarious S.P.E.C.T.R.E. organisation.

Blofeld Investment Management is a Saudi Arabian private investment company that owns a quarter of troubled Sharjah-based rig builder and offshore fabricator Lamprell. There is no evidence that the Saudi investment company has plans to sabotage American rocket launches, hold the world to ransom, or commit heinous crimes against innocent civilians. Instead, Blofeld needs to rescue Lamprell, which is listed in the London AIM stock market, even though its operations are centred on the UAE, where it employs some four thousand staff.

Lamprell is in dire straits, even as both oil and gas and windfarm fabrication activities surge. The company has repeatedly pleaded for extensions to publish its 2021 accounts – it is now July and Lamprell had not been able to release the accounts for the year up to December 31, 2021, so I can’t give you an accurate picture of its current balance sheet or cash flow.

Lamprell announced that it needs US$75 million very quickly to survive a liquidity crisis. Its shares in London promptly crashed 80 per cent in a day, before bouncing back slightly, but on July 1, they were suspended (never a good sign). On June 24, Lamprell told investors that it had received an approach from its major shareholder Blofeld Investment Management to buy the company for cash. The stinger was that Blofeld said it would only pay “a very significant discount to the prevailing share price.” As recently as 2018, Lamprell’s stock had traded at 100 pence. When they were suspended last Friday, the shares were trading at eight and a half pence.

Lamprell had tried to borrow additional funds from its banks, but the group’s lenders have indicated that the US$45 million loan the rig builder has been seeking will only be provided if the company is able to get its shareholders to put in new equity (like at Borr, Saipem, etc, etc).

Avoiding the death spiral

For a shipyard to be facing financial distress is dangerous, because it can lead to customers choosing to build at other more financially stable yards out of fear of a cash-crunch delaying delivery. Financial problems paying suppliers and staff can slow down construction and cause a yard to be liable for penalties and to make more payments in advance to suppliers, all of which compound the problems.

On Friday, July 1, the plot thickened when another shareholder announced that he too was contemplating making a bid for the company. This was Sami Al Angari, who owns a 19 per cent stake in Lamprell through Al Gihaz Holding Company.

The emergence of a second bid is good news, but the sooner Lamprell manages to get one of the bidders to cough up the actual cash to meet its operating requirements, the better. Until then, the situation remains critical, and suppliers, customers, and its large team of staff face uncertainty.

But as we saw with Borr, there has never been a better time for companies in the oil and gas sector to raise new equity and new debt.

If Shelf and Borr can do it, surely Lamprell can, too, even if the current minority shareholders take big losses. In the meantime, Lamprell’s shareholders might want some lavender oil and floral essences to help them relax. The next few weeks might be quite stressful for them. And they probably should not want to watch the 2015 Bond film Spectre, directed by Sam Mendes, where the true nature of Ernst Stavro Blofeld was revealed (here).

Background Reading

More on actual Rescue Remedy here.

You can read our previous coverages of Borr’s many woes and its complex relationship with Keppel here and here.

Lamprell’s confusing list of regulatory announcements to the UK authorities is here.