Cue the next funeral dirge in drilling…
way too many new UDW rigs built in an era where nobody thought the bottom would fall out from under a barrel of crude…it is truly the 1980’s back to life three decades on.
lots of hands from Frontier went to Pacific when Noble took over…have to wonder if anyone of them are still even employed today?
Well, the light is still lit on the Pacific Drilling building across the freeway. . . .
What I want to know is if the building yards for all these drillships built in the past 10years didn’t offer attractive financing terms to get the operators hooked into signing for yet more of these when it was more than obvious even during the boomtimes that too many were being contracted for? And if this is the case that shouldn’t those yards also take a significant haircut on what they are owed?
One may assume that those who make financial and other decisions for major Drilling Contractors are capable of thinking for themselves.
They must also be able to take responsibility for their decisions though, which doesn’t appear to be always the case.
The yards absolutely offered attractive payment terms, much to their own detriment. Just look at DSME in South Korea…they needed a multi-billion dollar bailout this spring just to stay afloat. They have complete or almost complete drillships sitting at their piers for Seadrill (2), Atwood (2), Vantage (1), and Sonangol (2) that haven’t been fully paid for and have no contracts. I don’t know the outcome of the construction contract arbitration a few years ago with the Vantage rig (Cobalt Explorer), but I think DSME took a full haircut on that one…I’m sure they’d give you a great deal on it! I’d guess the Seadrill Ch 11 will involve some restructuring of the obligation on those two rigs too.
Of course I too was of the belief that back when all these newbuilds were being contracted for that the world was extremely thirsty and that China alone would glady buy any surplus crude on the market at any price since they had so many hundreds of billions of surplus US dollars to spend and what better use for those dollars that such a useful resource?. Never for a second did I ever think China would become saturated with oil and not buy it all. Frankly, I am still shocked at that reality but staring in 2014 the new global energy order established itself and this the the new reality we all face today.
Many people are under the impression that the drillship building boom was based on some drilling business plan. Not true. The plan consisted of people wanting to make short term money. Investment banks went looking for places to make a buck with other people’s money. The drilling companies wanted to build new ships and took the money at ridiculous coupon rates, 12% plus in many cases. That is junk bond rates but the drilling companies took it and paid their executives ridiculous bonuses. The ship builders took the money knowing it was a high risk business but as long as their executives got enough bonus for finishing on time or ahead of time who cares? Everyone knew the boom was not sustainable they were just betting they wouldn’t be caught holding the bag. They hoped they would cash out or have been paid enough to live well for a long time. The investment banks that lent their clients money got paid up front, they didn’t care.
Now these same people are setting themselves up for the future. Fredriksen bought some bonds in his now bankrupt company for 30 cents on the dollar and is now setting himself up a sweet heart deal to make those bonds worth a LOT. Others in this game are doing the same.
There was never a business plan, only a get rich quick plan.Rank and file employees as well as stock holders were never in the equation.
agreed…it was so clear when so many new rigs were being build on spec as opposed to against firm contracts that makes this one so easy to see. sound business practice is to only commit to assuming such massive debt when you know there will be the revenue coming back to make that debt service. I have a business and I only assume more debt with great caution and maintain a debt level which I know is going to me supportable by me even if my revenues stay flat or even go down.
I do understand that when all these drillships were being ordered around 2009-10 that all new ships were getting charters at $500k+ a day and there was a fear that unless a slot at a yard was booked then the potential to need to wait more than a year to get in the queue but it still comes back to apparently no one looking back to the 80’s where vitually the exact situation occurred with multiple new streams of crude coming into the market while massive newbuilding was happening. I am frankly just surprised that now three years since the price crash that there have not been more spectacular bankruptcies!