COLUMN | There’s a price to be paid: ADES, Seadrill, and Icon jackup rigs; Sapura; Adnoc Drilling, Aban and others; Saipem and Lukoil [Offshore Accounts]
Eighteen months ago, we highlighted (here) the transformation of the Middle Eastern oilfield services market as big, state-owned players in Saudi Arabia, the Emirates, and Qatar were hoovering up rigs and boats.
The last six months has seen a further stampede of investment, a flurry of contract awards to state-owned companies in the Gulf, and some big profits for select investors. While others are staggering out of the industry downturn dazed and weakened, Abu Dhabi and Riyadh are committing to massive investments by their national oil companies.
Seadrill sells seven to Saudis for US$628 million
On Wednesday last week, in its first half results announcement, Seadrill announced (here) that it had received “a non-binding proposal for the acquisition of the legal entities that own and operate seven jackup rigs (AOD I, AOD II, AOD III, West Callisto, West Ariel, West Cressida and West Leda) in the Kingdom of Saudi Arabia.”
By Thursday, the non-binding proposal had become a Binding Share Purchase agreement, and the rigs were confirmed as sold (here). The buyer was… ADES, owned by Saudi Arabia’s Public Investment Fund (PIF).
ADES has been on a crazy roll, snapping up fifteen rigs (by my amateur and probably incomplete count), acquiring units from Maersk Drilling, Vantage, Valaris, Aban Offshore, Noble Corporation, and the creditors of Mexico’s Rio Oro (here), as well as bareboating two newbuildings from Keppel in Singapore (here). The first wave of the splurge took the purchases to around US$1 billion in cash.
Two billion… forty billion, Saudi largesse powered by oil
Now the second wave pushes the total spend by ADES to close to US$2 billion. So much for Saudi Arabia’s plans to diversify its sovereign wealth fund away from oil and gas (here).
Instead, state oil company Saudi Aramco will charter 26 new jackups this year, mostly from ADES it seems. The awards take Aramco’s total fleet of offshore rigs on hire in the kingdom to a record seventy-eight jackups, with a further ten rigs to follow next year according to Westwood Insight, or fourteen in 2023, if IHS Markit is to be believed. The average number of jackups chartered by Aramco in the last ten years has been forty-five.
High oil prices mean that Saudi Arabia’s export revenues now exceed US$40 billion a month. It plans to invest in one million barrels a day of additional oil production capacity, which should enable it to exercise tighter control over the market. Saudi Arabia has little way of investing the funds from US$100 a barrel of oil productively at home outside oil and gas, apart from in the futuristic dream city of Neom. So, much of the cash is finding its way back into ever more exotic investments and vanity projects.
ADES’ sugar daddy owner PIF has been demonstrating its willingness to spend the windfall on everything from shares in Google, Zoom and Microsoft in August (here), to a massive new golf tournament to challenge the PGA (here), an 80 per cent stake in Newcastle United, a Premier League football club in the UK, and plans to launch a huge new airline called RIA to rival Emirates, allegedly, with a hub in Riyadh (here).
The Seadrill deal set a new benchmark
ADES is paying Seadrill US$628 million in cash, subject to adjustment for working capital and other items, and reimbursement to Seadrill for any project costs spent at the time of closing in relation to the reactivation of the three stacked jackups, which are West Ariel, West Cressida and West Leda. The cost translates into approximately US$100 million per rig on a ready to drill basis, Seadrill says. This suggests that the price of reactivating jack ups to the Aramco standard has risen to around US$25 million per unit, much more than has been indicated in the past, and indicative of inflationary pressures building in the offshore industry.
Fresh out of bankruptcy, the deal locks in cash for Seadrill’s shareholders, who are mostly its former lenders. They took shares when they wrote off their loans and bonds to the company when it restructured in a second bankruptcy which began in February 2021 (here).
Seadrill is not the only beneficiary of the latest round of ADES’ largesse.
Malaysians win big
It’s been a great month for Malaysia. Justice was seen to be done when the crooked former prime minister Najib Razak was sentenced to twelve years in prison and made to pay a US$50 million fine for his part in the shocking 1MDB scandal, where he and his cronies attempt to siphon off billions from a state investment fund.
Last week, his wife Rosmah Mansor was sentenced to ten years in prison and fined US$216 million after being found guilty of three counts of bribery relating to a solar energy project (BBC coverage here). When police raided the couple’s house, they found a million-dollar gold and diamond necklace, fourteen tiaras, and 272 Hermes bags. Further corruption and embezzlement charges are outstanding against her.
Also gloating this week were the shareholders of Icon Offshore. ADES also announced that it was buying the jackup Perisai Pacific 101 from the Malaysian company. The sale price was US$85 million, according to the Malaysian company (here). Icon pointed out that the sale price of US$85 million is double the price it paid to purchase the jackup rig from compatriot Perisai Petroleum Teknologi in October 2020 (here).
That’s a great result for Icon – proof that well timed asset plays can deliver big returns.
Not delivering big returns, however, is Sapura Energy, whose difficulties we analysed in March. Its new turn-around CEO, Datuk Anuar Taib, has described this year as one of the most challenging years in the group’s history, as Sapura faces what he described as, “an unprecedented liquidity crunch.”
In June, the company announced a return to a profit of US$20 million in the first quarter to the end of April. This was driven by a large foreign exchange gain, as the Malaysian Ringgit weakened against the US dollar, rather than by any improvement in the company’s operations.
As we have seen with other cash-strapped players in the offshore space, holding laid-up assets is expensive. Sapura doesn’t have cash. Thus, in August Sapura announced here that it was selling three of its tender rigs for scrap. Sapura T-19 (built 2010), Sapura T-20 (built 2014), and Sapura Setia (built 2005) to NKD Maritime for US$8.2 million, based on a scrap price of US$280 per ton.
99 per cent gone!
The units had been acquired from Seadrill for the princely sum of around US$200 million each in 2013. So, that’s close to 99 per cent value destruction under disgraced former CEO Tan Sri Shahril Shamsuddin, possibly Malaysia’s worst ever corporate CEO.
Sapura stated that the Rigs are either aging (Setia) or not technically competitive (T-19, T-20) and that, “based on the market demand, the company does not see any financially viable prospects that could cater for the rigs to be reactivated in the foreseeable future. Therefore, the rigs have a high probability of being stacked in the coming years, which exposes the company to more costs and risk of deterioration.”
For a company in Sapura’s desperate condition, loaded with over US$2 billion in debt, waiting – as Icon waited – is not an option. Its assets are on the block as it tries to negotiate a deal with its creditors.
NPCC buys Sapura 3000
In May, Sapura announced that it was also selling its flagship pipelay and crane vessel Sapura 3000 to the AD Ports subsidiary, Safeen Feeders. AD Ports also owns the Emirates’ largest offshore construction company, NPCC. It is likely that the unit will be deployed to NPCC, when it departs Malaysia.
The deal closed last month, and Sapura received US$71.5 million for the DP2 ship, built in 2008, which is 151 metres long and is fitted with a 3000-tonne capacity revolving mast crane. More cash for Sapura, at the price of selling off the crown jewel of the company’s offshore construction fleet.
ADNOC awards big contracts… to itself
The expansion of NPCC is part of the UAE’s efforts to increase its oil production. State oil company ADNOC has set itself the ambitious target to deliver five million barrels per day of oil production capacity, and to realise gas self-sufficiency for the UAE. Just as Saudi Aramco (owned by the Saudi state) has awarded drilling contracts to ADES (owned by the Saudi state), ADNOC (owned by the Emirati state) has awarded huge contracts to ADNOC Drilling (also owned by the Emirati state).
In August, ADNOC granted two contracts worth more than US$3.4 billion to ADNOC Drilling. In July ADNOC had also awarded ADNOC Drilling another pair of tenders worth US$2 billion, linked to ADNOC’s Hail and Ghasha development project.
In July, ADNOC Logistics and Services, the oil company’s shipping and maritime logistics arm, announced that it was acquiring Zakher Marine International, the Abu Dhabi-based shipping company and owner of the world’s largest fleet of self-propelled liftboats. Within weeks, lo! ADNOC had awarded a massive contract for liftboats.
The winner was… ADNOC Logistics and Services, which bagged a US$1.17 billion charter for thirteen of the liftboats formerly owned by Zakher.
Talk about keeping it in the (ADNOC) family.
Four more offshore rigs
To support ADNOC’s drilling growth, like ADNOC Logistics and Services and ADES, ADNOC Drilling has continued its rig buying spree.
In May, ADNOC Drilling announced it had acquired the two jackups SMS Mariam and SMS Faith from the Chinese-owned offshore companies Well Target Five and Well Target Six. No price was given for this transaction.
In July, India’s Aban Offshore announced that it had closed the sale of the jackup Deep Driller 8 to ADNOC Drilling for about US$28 million. Then at the end of August, ADNOC Drilling announced it was buying another, unnamed premium jackup for US$70 million. No details of the name of the rig or the seller were announced.
The four newly purchased jackups bring ADNOC Drilling’s total offshore fleet to 28 operational rigs. Again, this is a record utilisation for the company and the country.
Two big questions…for next week
With Middle Eastern demand running red hot for jackups, and prices now passing the US$100 million per rig mark again, we should expect the rigs abandoned at Keppel Shipyard in Singapore and state-owned yards in China to finally make their way onto international markets.
That raises two obvious and important questions, which we will address next week…
Saipem and Lukoil
Finally, as Elton John didn’t quite put it (here), “It’s a human sign, when things go wrong…” to let go of a company’s CEO.
Saipem has taken this advice to heart. After its rocky rights issue, which left the underwriting banks holding millions of unwanted shares in July (here), the Italian construction company and rig owner announced that CEO Francesco Caio had resigned with immediate effect last week.
He had only been in the job for fifteen months. The company said, with a glorious sense of irony, that Caio had resigned, “as he considered completed, with the first half year results, his role to reposition and relaunch the company” (here). The Saipem board of directors has unanimously appointed Alessandro Puliti as replacement CEO. Puliti, a thirty-year ENI veteran, had been parachuted into Saipem earlier this year as General Manager.
At least Mr Caio can take heart that he was only metaphorically defenestrated.
On the same day that Mr Caio resigned from Saipem, the Chairman of Russian oil company Lukoil, Ravil Maganov appears to have been literally defenestrated. He plunged to his death from the sixth-floor window of a Moscow hospital, a fall that (wink) the Russian authorities have indicated was a suicide.
This might be plausible were it not for the fact that at least five other Russian oil industry executives have died under mysterious circumstances since the war in Ukraine began in February. Another senior Lukoil manager, Alexander Subbotin, was found dead near Moscow in May after reportedly visiting a shaman and being treated with toad poison, which caused a heart attack. Allegedly. Lukoil was the only Russian oil company to have criticised the invasion of Ukraine, publishing a statement in March regretting the “tragic events in Ukraine” (here).
Sergey Protosenya, the former manager of TotalEnergies’ former partner company in Russia, Novatek, was found hanged in the garden of his home in Lloret de Mar in Spain in April. His wife and daughter were found dead in their beds in the house, killed by stab wounds. Others have perished in equally suspicious circumstances.
The full listing of the dead Russian oil industry executives is here. If you thought your performance review went badly, spare a thought for those unlucky enough to be dependent on the whim of Russia’s dictator.
Like tens of thousands of Ukrainians and tens of thousands of Russian soldiers, many are paying the ultimate price for President Vladimir Putin’s vanity.
More on PIF’s “world class” investment portfolio here.
ADNOC Drilling remains publicly listed so we have much better visibility over its performance than ADES’. All ADNOC Drilling stock exchange releases can be found here.
Reuters’ coverage of Rosmah Mansor’s conviction is here. We love her quote when the judge announced the verdict: “”Nobody saw me taking the money, nobody saw me counting the money…. but if that’s the conclusion, I leave it to God.”