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Debt hyenas are circling stricken rig contractors

Some of the big rig contractors are in trouble.
Some of the big rig contractors are in trouble.

What in recent offshore industry terms were regarded as five of the most powerful brands in US drilling history are in deep trouble and the situation can only get worse.

The famous names are Ensco and Rowan, which were merged last year to form UK-based Valaris, Diamond Offshore, Noble Corporation and Transocean, though the latter has its brass doorplate at Zug in Switzerland, shifting there in 2008 to cut its tax bill.

Valaris is negotiating terms with its creditors, Diamond Offshore has filed for Chapter 11 protection from its creditors and there is speculation regarding both Noble and Transocean.

But let’s take a closer look at Valaris. On April 21, Reuters reported that the company was preparing to begin talks with creditors to see if they can agree on terms for a possible bankruptcy filing.

In March, the news agency had claimed that the London-based company was working with debt restructuring advisers as it was saddled by a $6.5 billion debt with only $100 million in cash and little prospect of wrecked global oil prices recovering any time soon.

Another reason was that it was struggling with two North Sea rig accidents involving cranes collapsing in less than a month, plus a blow-out preventer stack had been dropped to the seafloor in an incident off Angola.

Valaris employs 5,800 people worldwide and, in March, had a contracts backlog totalling $1.9bn. That’s actually only modest by today’s offshore drilling major standards and could quickly evaporate if any further contracts get cancelled by oil company clients.

One Wall Street analyst said: “Valaris has experienced the most drastic fall-out that I have witnessed in the offshore drilling industry. I am still amazed at how quickly this company collapsed in such short notice.”

Turning to Diamond and its now threatened global workforce of 2,500, this is a US drilling contractor whose name is threaded through much of the history of the North Sea.

In its Chapter 11 petition filed at the US Bankruptcy Court for the Southern District of Texas (Houston), the driller said operating conditions had worsened “precipitously in recent months”.

In the filing, Diamond reported $5.8 billion of assets and $2.6bn of debt, but only $435m of cash on hand.

The beauty of Chapter 11 is that it provides vital protection to enable a company to lick its wounds, undergo corporate surgery as necessary and eventually re-emerge suitably restructured and once again viable.

Or it could be bought.

Regarding that option, no one’s going to tell me there isn’t some vulture interest being shown in the boardroom of Transocean, which has accumulated a number of scalps to hang from its belt since the end of the late 1990s crisis, such as Aker Drilling, Ocean Rig UDW, R&B Falcon and Songa Offshore.

Transocean (RIG) holds a record backlog of $9.6bn as of April 16, plus it possesses a portfolio of options that, according to Wall Street, could “add many more billions after the acquisition of Songa Offshore and, more recently, Ocean Rig UDW on a much smaller scale”.

RIG is therefore regarded as being the strongest and so the most likely to survive the current bloodbath.

Though, as hinted above, it could turn carnivore and pick off one or more of its smaller brethren, even this company is now considered vulnerable. But then who would take on Big Drilling’s number one predator, I wonder?

As for Noble, according to Vladimir Zernow writing on Wall Street’s Seeking Alpha board, the company recently delivered key signals that it was prepping to dive for cover by paying off seller loans on jack-ups Noble Joe Knight and Noble Johnny Whitstine in exchange for a discount to the outstanding loan balance.

The company made a payment to the tune of 85% of outstanding principal amount of the seller loans plus accrued and unpaid interest.

In order to perform this transaction, Noble borrowed $100m from its credit facility. The amount outstanding under this credit facility increased to $545m, while the company maintains the ability to borrow up to $297m.

Zernow says: “It is not surprising that Noble decided to pay off the secured loans before it hit the liquidity covenant under the credit facility.

“After this move, the whole debt will be unsecured as both the credit facility and senior notes, which comprise the majority of Noble’s debt, are unsecured.

“This is a good set-up which will facilitate restructuring which is inevitable at this point since Noble continues to burn through cash.”

To sum up, the only certainty at present is utter hell for the drilling sector.

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