Fitch: Depressed Drillship Price Dims Default Recovery Prospects

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Ocean Rig UDW's recently announced acquisition of a sixth generation drillship at less than 10% of its newbuild cost provides yet another signal of the dim market outlook for offshore drillers, according to Fitch Ratings. The $65 million valuation will likely prompt creditors to take a more conservative view of offshore rig values, which could lessen recovery prospects in an offshore driller default scenario.

Ocean Rig did not indicate its immediate intentions for the uncontracted drillship built in 2011. However, the challenged market environment and Ocean Rig's weak financial condition essentially limit the operational options to either aggressive bidding or stacking.

Fitch estimates that Ocean Rig could generate positive cash flow and earn an attractive return on capital, subject to any additional upgrade costs, with a day rate in the low-$200,000s if awarded a multi-year tender. This would be substantially below the $500,000-plus day rates these types of rigs previously fetched. Fitch does not anticipate the company will stack the drillship, since the costs would be a drag on liquidity at a time when Ocean Rig's backlog begins to meaningfully roll off.

Fitch's view remains that while most customers may prefer the lowest cost and highest quality assets, careful consideration will be given to an operator's size, staying power, geological familiarity, and historical operating performance. This has generally been the case with some legacy assets finding work, but tendering activity has been very limited with contracts mainly being short-term in nature. Recent market contracting precedents, including two Ocean Rig contract cancellations for convenience in February 2016, suggest that the company's ability to secure a new multi-year contract will likely be a challenge.

The sale also establishes a new offshore rig valuation low and provides another data point following an Odfjell Drilling affiliate's sale of a similar sixth generation drillship for $210 million in March 2016. The price difference suggests that the market for offshore rigs is highly illiquid and uncompetitive due to weak medium-term contracting prospects, uncontracted carrying costs, and challenged incumbent financial conditions. Fitch believes that creditors are likely to adopt a more conservative view of offshore rig values that will negatively influence prospective recovery in an offshore driller default scenario.

Further, the type of acquirer - a smaller, opportunistic driller - signals that the near-term priority of larger, more established offshore drillers is liquidity management. Fleet high-grading activity, even at these seemingly attractive levels, is likely to wait until a market recovery becomes more evident.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160427006026/en/

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Source: Fitch Ratings

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