Friday, July 21, 2017

Atwood Advantage Is Too Expensive For Noble Energy. Ensco May Not Like It - SEEKING ALPHA

Drillship Advantage
Jul. 21, 2017 1:46 AM ET


  • On July 18, 2017, the Leviathan partners and Noble Energy decided to terminate a contract with Atwood Advantage and promote a contract with another drilling rig.
  • The Atwood Advantage was working for Noble Energy in Israel at $581K/d until August 2017. So, the loss is limited, but it is still a solid negative.
  • This new termination is a wake-up call for Ensco and its shareholders. The acquisition of Atwood seems overvalued and unnecessary at the moment, in my opinion.
The Atwood Advantage is a DP3 Drillship, delivered by DSME in 2013, capable of operating at 3,658 meters (12,000 ft.) of water, drilling depths of up to 12,200 m (40,000 ft.) and has accommodations for 200 personnel.

Investment Thesis:
The oil crash that began late in 2014 has delivered a terrible blow to the oil industry, especially to the offshore drilling players such as Transocean (RIG), Seadrill (SDRL), Rowan Companies (RDC), Ensco PLC (ESV) or Noble Corporation (NE), and another dozen or more companies struggling to avoid a financial meltdown, including Atwood Oceanics (ATW), due to a basic lack of drilling contracts, dismal day rates at below-breakeven levels in some cases, and lingering concerns about rig oversupply that continues to worsen as work is vanishing.

Nonetheless, the growing sentiment in the offshore drilling sector is that the market has stopped degrading, prompting oil producers to look ahead for new opportunities in order to increase their fast declining oil & gas reserves, at a very attractive cost never achieved before.

The contracting activity in the jackup segment has shown clearly a nascent recovery shaping up during the first half of 2017.

It is now slowly expanding to the floater class, and I was glad to report several welcomed contracts, such as the Seadrill Drillship West Saturn in Brazil or the Ensco three drillship contracts in West Africa.

The caveat is that this nascent recovery comes with a tremendous reduction in day rate, and the floater segment is the prime victim of this type of "adaptation". Day rates well over $600k/d a couple years ago are down to around $150-200K per day now. Vantage Drilling Inc. (OTCPK:VTGDF) signed a three-year contract for its 6G drillship Platinum explorer with ONGC in India, a few weeks ago at a whopping $110k/d.

Unfortunately, Atwood Oceanics UDW rig fleet is not well protected against this situation, with short-term contracts that can be terminated quickly at a limited cost for the operator.

Hence, it makes me wonder if the acquisition announced by Ensco on May 30, 2017, should not be seriously reassessed and re-negotiated, or even simply canceled, due to an obvious over-estimation of Atwood asset valuation and a clear misunderstanding of the risks involved with such untimely move.

News today:

According to OffshoreEnergyToday (excerpt):

Noble Energy notified the Leviathan partners that since the results of the tender recently received indicate the possibility of contracting with a drilling rig at significantly lower costs than those of the Atwood Advantage rig, it recommends ending the contract with Atwood Advantage after completion of the Leviathan 5 Well and continuing the drilling of the lower part of Leviathan 7 Well with an alternative drilling rig.
Accordingly, Delek said, on July 18, 2017, the Leviathan partners decided to terminate a contract with Atwood Advantage, and promote a contract with another drilling rig, which will drill the lower part of both Leviathan 7 and Leviathan 3 wells to their final depth, as from the first quarter of 2018. After that the rig will complete the production drilling on the Leviathan project.

Analysis of the Atwood fleet status after the effect of the Noble Energy early termination
Atwood Oceanics May fleet status. Please click here.

The drillship Atwood Advantage was working for Noble Energy (NYSE:NBL)in Israel at $581K/d until August 2017. The loss is thus quite limited, but it is a real negative because the company expected to get an extension. Furthermore, I wonder how solid is the contract for the Atwood Achiever working for Kosmos at $595.5K/d?

Important Note: Please do not confuse Noble Energy with Noble Corp.

I have estimated the actual backlog at $324 million.

Atwood fleet                            Drillships    SemiSubs    Jackups

Operational                                    1                2                1
Idle or Under Construction              3                0                4
Total                                              4                2                5

Atwood counts only four rigs under contract or about to work (Atwood Condor scheduled to work starting 2018) with the Atwood Achiever rolling off contract in November 2017.

The two drillships under construction are "available" and have no firm contract, despite what Atwood management has indicated about a potential contract in Brazil. The company has five jackups, and only one is under contract until April 2018. This is a huge liability.

Obviously, this situation is not sustainable as it is, and Atwood is a serious candidate for either a restructuring under bankruptcy protection or an out-of-court deal, to cut its debt load in light of a disappearing backlog?

Unless, of course, the company uses an equity financing to cut the debt by 50%+, which will have the potential to dilute ATW into oblivion.

Thus, why Ensco decided to act so quickly and pay a small fortune for a troubled company, on its way to a financial re-organization?

Balance sheet as of the last quarter:

At the end of the last quarter, long-term debt was $1.298 billion with no debt maturity until May 2019.

Remaining liquidity was $700 million at the end of 2016 (including the remaining revolver with the balance of $449 million) after the company paid $55 million as a milestone for the two UDW Drillships under construction, $68 million in debt service, and $55 million in maintenance.

The last equity financing added approximately $175+ million net, which increased liquidity to approximately $875 million.

Initially, I was considering this merger as a net positive, but I have to change my opinion after further analysis of the ATW fleet situation. I believe Ensco is making a costly mistake and should either renegotiate the deal with a lower valuation for ATW or just cancel and check the potential later next year. As an ESV shareholder, I am now totally opposed to the deal and will vote against it.

Conditions and Timing
The transaction is subject to approval by the shareholders of Ensco and Atwood, as well as other customary closing conditions. The transaction is not subject to any financing conditions. Ensco and Atwood intend to file a joint proxy statement/prospectus with the Securities and Exchange Commission as soon as possible. The companies anticipate that the transaction could close as soon as calendar third quarter 2017.

The deal is that Atwood shareholders will receive 1.60 shares of Ensco for each share of Atwood common stock. This is obviously grossly overvalued, and Ensco should change the deal with a share swap of about 1:1 or even below. I would be more comfortable with a simple cancellation.

Important note: Do not forget to follow me on the offshore drilling industry. Thank you for your support.

Disclosure: I am/we are long ESV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade also ESV on special occasions.