Given recent volatility, if shit hits the fan and oil crashes, how secure are the backlogs?
Can the IOC's weasel out of the contracts ?
Also, people keep talking about expected scrapping in 2025 or 2026. So why were these not scrapped alredy? why pay for warm/cold stacked for several years, only to scrap them at the end?
(1) It depend on the terms and conditions of contracts (private), as well as the nature of the projects behind them. High profile projects with significant other capital commitments unlikely to be cut, but short-term, more flexible infill drilling are more susceptible. Need to underwrite each project.
(2) It depends on the T's and C's of contracts. Generally speaking, higher spec rigs have more negotiating power which may reduce option value of IOC's to break terms. You also need to understand the importance of each project to an IOC. That requires an underwriting of the IOC's capex and cash flows and their inventory of projects.
(3) Scrapping is a permanent decision and deepwater drilling moves slowly. I expect some announcements in coming months. I think some of them are still being bid into potential projects, although I believe the writing is on the wall with a few of these rigs long-term and I'd stop paying stacking expenses on a few of them.
Considering that ARO had a target of acquiring 20 new jack-ups over roughly 10 years, and they currently only have 3, while Borr just received 2 more — one of which was still in Singapore during the last earnings call — in the event of market stress (which tends to occur every couple of decades) or a notable recession, ARO would likely be glad to pick up such assets at a discount, and Borr would probably welcome the liquidity to weather the downcycle, wouldn’t they?
Is the market properly reflecting the value and potential liquidity of these jack-ups even during a downturn?
The jack-ups you're referencing are collateral on Borr's 1L secured bonds. Borr raised $325mm in 2H 2024 to finance the acquisition of Var and Vali. I have not dug through Borr's indenture but I believe the sale of either would require mandatory paydown of the 1L secured debt.
Good analysis on ARO. I have thought the same regarding Borr's recent JU deliveries. Although, I do not think sale proceeds would be potential liquidity for Borr, and instead would be mandatory debt reduction given their 1L collateral nature. I haven't dug entirely through the indenture but it will lay out the terms you're seeking regarding potential liquidity.
Good article. What can I say? If it was easy, anybody could do it…😎
Given recent volatility, if shit hits the fan and oil crashes, how secure are the backlogs?
Can the IOC's weasel out of the contracts ?
Also, people keep talking about expected scrapping in 2025 or 2026. So why were these not scrapped alredy? why pay for warm/cold stacked for several years, only to scrap them at the end?
(1) It depend on the terms and conditions of contracts (private), as well as the nature of the projects behind them. High profile projects with significant other capital commitments unlikely to be cut, but short-term, more flexible infill drilling are more susceptible. Need to underwrite each project.
(2) It depends on the T's and C's of contracts. Generally speaking, higher spec rigs have more negotiating power which may reduce option value of IOC's to break terms. You also need to understand the importance of each project to an IOC. That requires an underwriting of the IOC's capex and cash flows and their inventory of projects.
(3) Scrapping is a permanent decision and deepwater drilling moves slowly. I expect some announcements in coming months. I think some of them are still being bid into potential projects, although I believe the writing is on the wall with a few of these rigs long-term and I'd stop paying stacking expenses on a few of them.
Considering that ARO had a target of acquiring 20 new jack-ups over roughly 10 years, and they currently only have 3, while Borr just received 2 more — one of which was still in Singapore during the last earnings call — in the event of market stress (which tends to occur every couple of decades) or a notable recession, ARO would likely be glad to pick up such assets at a discount, and Borr would probably welcome the liquidity to weather the downcycle, wouldn’t they?
Is the market properly reflecting the value and potential liquidity of these jack-ups even during a downturn?
The jack-ups you're referencing are collateral on Borr's 1L secured bonds. Borr raised $325mm in 2H 2024 to finance the acquisition of Var and Vali. I have not dug through Borr's indenture but I believe the sale of either would require mandatory paydown of the 1L secured debt.
Good analysis on ARO. I have thought the same regarding Borr's recent JU deliveries. Although, I do not think sale proceeds would be potential liquidity for Borr, and instead would be mandatory debt reduction given their 1L collateral nature. I haven't dug entirely through the indenture but it will lay out the terms you're seeking regarding potential liquidity.
Yes, that's exactly it. According to the indenture, they must use the cash payment to reduce the debt.