SeaDrill Moving On? (SDRL)
It looks like the consolidation that many of us foresaw for the deepwater drilling business might not come to fruition after all -- or at least, not to the degree expected. Many of these companies, from Global SantaFe to Noble to Pride International, have been rumored takeover or merger candidates as the day rates for deepwater drilling ships and rigs have skyrocketed.
One of the possible acquirers of many of these companies, however, sounds like they just took themselves out of the game -- and gained a nice share boost in return for that comment. SeaDrill, my largest individual stock holding, was a rumored suitor for Pride International last year, and for Noble and GSF earlier this year, among others (and they have done their share of acquiring, with the biggest one being their takeover of Smedvig ... a company they bought by outbidding and outmaneuvering Noble, by the way).
But now, in an announcement that they were ordering yet another deep water rig, SeaDrill management noted that they "believe that this newbuilding opportunity at the Jurong Shipyard is superior to US Corporate acquisitions from a financial as well as fleet quality point of view.''
So instead of pouring cash into a US acquisition, which had been a top priority for the company, they'll be pouring some of it into a mighty expensive rig that will be delivered in about three years (and even that's pretty early -- the slots at the best yards are pretty full even through 2010 according to some other interested folks).
It's hard to argue with them, considering the relatively high prices of the US drilling rig owners relative to their fleet value -- but I still wouldn't be surprised to see John Fredriksen do more acquiring. It looks like they're going to finally finalize the takeover of the rest of Eastern Drilling that they don't own (though that's really just one rig -- one fantastic rig, but still one rig).
I still really like this investment, though -- not only are the yards quite overtaxed as they build these rigs in a frenzy of demand (including the yards owned by Keppel Fels, which is another of my portfolio companies), but the rig customers are also having to wait in line. It seems that the oil exploration companies, at least, still believe there is a significant amount of oil to be found in the deep waters of the world, and that it will be worth finding and extracting ... after all, though these rigs can cost $500 million, the latest letter of intent SeaDrill has signed with a customer is for $531,000 a day to lease a similar rig. At that rate, the lease payments pay off the cost of the rig in just about three years (without taking into account other costs), which is just about the ratio SeaDrill is still looking for. (The total value of that five-year letter of intent is $970 million, which is close to 2X what they're now paying for a newbuild rig ... not bad)
As long as the rigs are in demand and users are willing to sign five year contracts that don't even start for several years, it's certainly worth it to buy one for over $500 million, even if you won't see it hit the water until mid-2010. Phew. Crazy business, but one with massive cash flows, and if SeaDrill continues along this track without major acquisitions I'd expect them to begin a significant dividend of those cash flows to shareholders within the next couple years, as Fredriksen did with his Frontline tanker business (perhaps in part by selling the rigs off to Ship Finance, which is also riding high, and getting relatively generous lease-back deals). Should be a very interesting company and space to watch over at least the coming three years.
Oh, and it doesn't hurt that the Department of the Interior is proposing opening up the outer shelf to drilling on the West and East coasts ... not just on the (poorer) Gulf coast ... with the leases to begin at a time when there are very few advanced drill rigs available for rent. I don't know if that will go through, it's certainly politically volatile, but if it does the impact on drill rig owners and service companies with US exposure could be significant in the short term.
One of the possible acquirers of many of these companies, however, sounds like they just took themselves out of the game -- and gained a nice share boost in return for that comment. SeaDrill, my largest individual stock holding, was a rumored suitor for Pride International last year, and for Noble and GSF earlier this year, among others (and they have done their share of acquiring, with the biggest one being their takeover of Smedvig ... a company they bought by outbidding and outmaneuvering Noble, by the way).
But now, in an announcement that they were ordering yet another deep water rig, SeaDrill management noted that they "believe that this newbuilding opportunity at the Jurong Shipyard is superior to US Corporate acquisitions from a financial as well as fleet quality point of view.''
So instead of pouring cash into a US acquisition, which had been a top priority for the company, they'll be pouring some of it into a mighty expensive rig that will be delivered in about three years (and even that's pretty early -- the slots at the best yards are pretty full even through 2010 according to some other interested folks).
It's hard to argue with them, considering the relatively high prices of the US drilling rig owners relative to their fleet value -- but I still wouldn't be surprised to see John Fredriksen do more acquiring. It looks like they're going to finally finalize the takeover of the rest of Eastern Drilling that they don't own (though that's really just one rig -- one fantastic rig, but still one rig).
I still really like this investment, though -- not only are the yards quite overtaxed as they build these rigs in a frenzy of demand (including the yards owned by Keppel Fels, which is another of my portfolio companies), but the rig customers are also having to wait in line. It seems that the oil exploration companies, at least, still believe there is a significant amount of oil to be found in the deep waters of the world, and that it will be worth finding and extracting ... after all, though these rigs can cost $500 million, the latest letter of intent SeaDrill has signed with a customer is for $531,000 a day to lease a similar rig. At that rate, the lease payments pay off the cost of the rig in just about three years (without taking into account other costs), which is just about the ratio SeaDrill is still looking for. (The total value of that five-year letter of intent is $970 million, which is close to 2X what they're now paying for a newbuild rig ... not bad)
As long as the rigs are in demand and users are willing to sign five year contracts that don't even start for several years, it's certainly worth it to buy one for over $500 million, even if you won't see it hit the water until mid-2010. Phew. Crazy business, but one with massive cash flows, and if SeaDrill continues along this track without major acquisitions I'd expect them to begin a significant dividend of those cash flows to shareholders within the next couple years, as Fredriksen did with his Frontline tanker business (perhaps in part by selling the rigs off to Ship Finance, which is also riding high, and getting relatively generous lease-back deals). Should be a very interesting company and space to watch over at least the coming three years.
Oh, and it doesn't hurt that the Department of the Interior is proposing opening up the outer shelf to drilling on the West and East coasts ... not just on the (poorer) Gulf coast ... with the leases to begin at a time when there are very few advanced drill rigs available for rent. I don't know if that will go through, it's certainly politically volatile, but if it does the impact on drill rig owners and service companies with US exposure could be significant in the short term.
This article posted by One Guy @ 5/02/2007 11:03:00 AM 0 comments
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