View from Las Palmas: Six Drillships at a Dock
While on assignment to value offshore assets on behalf of banks, we took this spine-chilling picture of six drillships sitting idle at Puerto de la Luz, the port of Las Palmas, Gran Canaria, Spain. Doing what we do, we immediately thought of value and valuations: These six shipping assets were valued collectively in excess of $3 billion, or more than $500 million each, at the top of the market a decade ago.
A similar asset – and a bit more modern – was sold last year for just $50 million, which would imply a measly $300 million for the whole lot, which is still a very respectable value number to fit into just one picture. Probably the $50 million judicial sale price was a one-off transaction and, hypothetically, the assets in the photo are likely valued at twice as much as their price would be at judicial sale (Forced Liquidation Value).
We counted four more idling drillships and semi-submersible platforms, bigger and more sophisticated than the “magnificent six,” anchored at other areas of the port at Las Palmas. And we saw four more drillships tied up together and anchored idling at Perama, Greece just a week earlier. Not a good time to be a drillship these days.
Rate & Price Volatility
Although drillships and semi-submersible platforms are more like floating energy production facilities rather than actual ships engaged in the transport of cargo, they behave almost like any other shipping asset in terms of freight market volatility, asset price volatility, and asset and ownership risk.
A decade ago, at the top of the market, when oil was priced close to $150/bbl, VLCC tankers were earning close to $200,000 per day, and the latest (fifth-generation) drillships were earning close to one million dollars per diem. Now, with the price of oil at $70/bbl, VLCCs are earning close to $30,000/day and modern drillships, if they can find employment at all, earn $150,000/day, a small fraction of their past earning power. Such are the fortunes of shipping (and the energy market).
And logically, when the market was at the top, fifth-generation drillships were valued at $750 million brand-new, what the seller would dictate. Now, trying to value these assets – which admittedly is a niche overall market with few assets worldwide – reminds us of the old joke: “You ask a mathematician how much is 1+1, and the answer comes back as 2. You ask an engineer the same question, and the answer is 2.0 precisely. You ask an accountant how much 1+1 is, and the answer is ‘How much do you want it to be?’”
It’s something similar with valuations of these assets. There’s the sacrosanct Fair Market Value (FMV), which is the Gold Standard, but most of the conditions for achieving FMV cannot be satisfied under current market conditions. Most of the sales take place from motivated sellers and qualify as Orderly Liquidation Value (OLV) sales after sufficiently shopping the asset in a weak market of speculative buyers. If there’s more “motivation” to sell, like a court order, there is the previously mentioned Forced Liquidation Value (FLV).
And, since there is little prospect of immediate employment, buyers buy such assets on speculation at a low enough price and have to deal with the asset and ownership risks like maintaining and paying for storage costs for the assets. By the time recovery comes, the assets may suffer from functional obsolescence and need some serious refurbishment to get back in shape. They may even suffer from incurable functional obsolescence when new technologies and developments make them too old-fashioned to upgrade.
Market risk is a great primer for business (and life itself). Throughout economic history grand fortunes in shipping and energy have been documented for entrepreneurs who managed to handle risk just fine.
As for those entrepreneurs and companies that bought these assets at the top of the market at $750 million each, they were not necessarily “suckers” who made “bad investments.” Some actually made money at those levels, but there were many more who lost money. Coincidentally, one of the idling drillships seen on this trip had its parent company file for bankruptcy protection just this week for “not being able to agree on the terms for a consensual restructuring, and the secured creditors have demanded payment of all amounts outstanding under the secured debt of the Company.”
Looking more incisively at the picture of the six idling drillships, one has to wonder whether they present a perfect image of a great investment for a sharp investor to make and create great value from again. Or are they just proof of the destruction of value and nothing more, and an artifact of a crazy market in 2008 when the sky was the limit in terms of pricing? Or just an encomium to our ever resource-demanding culture and way of living?
Sadly, they may just be another obituary for the good times that once were for Big Oil as solar and wind and renewables keep driving more nails into the coffin of fossil fuel energy sources.
Basil M. Karatzas is the CEO of Karatzas Marine Advisors & Co. (http://www.karatzas.com), a shipping finance advisory and ship-brokerage firm based in the New York City. Basil has more than fifteen years of shipping market expertise, holds an MBA in International Business and Finance from Rice University in Houston, Texas, and has graduated from the Owner / President Program at Harvard Business School.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.