Noble Corp.’s long anticipated “bon voyage” to its lower tier commodity assets is the latest sign of a bifurcating offshore rig market.

The company announced Sept. 24 that its board had approved a drop down of legacy equipment – including five drillships, three semisubmersibles, 34 jackups, two submersibles, and one FPSO unit – into a company to be spun off to shareholders in a tax-free deal, possibly as early as mid-2014.

The deal may incorporate an accompanying initial public offering (IPO) that would include 20% of shares in the new entity.

Noble will retain 20 floaters and 15 jackups, mostly new or higher-specification equipment adapted for deepwater and ultra-deepwater markets or harsh-environment applications for jackups. Noble will claim almost 80% of its future revenues and margins from newer deepwater and ultra-deepwater equipment following the split, which it believes will sweeten investment prospects for shareholders who have experienced frustration on stock performance vis-à-vis other offshore peers.

The move speaks to the unfolding bifurcation in the offshore fleet where strong customer interest is gravitating to higher specification deepwater and ultra-deepwater equipment, the latter of which is often working down market these days and displacing older, legacy equipment in a post-Macondo environment.

Noble’s split had been discussed for more than a year and appeared to be contingent upon a favorable tax ruling from the US Internal Revenue Service, which Noble anticipates receiving “soon.” The deal also is subject to shareholder approval. Should the deal move forward, the new company would file for an IPO late in 2013 or early 2014.

Proceeds from the IPO would be directed to any debt the new company incurred as part of the spin off from Noble, while Noble will apply proceeds from the sale to its own debt reduction.

Offshore drillers have lost investor sparkle of late as day rate softness began seeping through fifth-generation floaters in 3Q 2013, leading to concerns that offshore rates had peaked for this cycle. Additionally, rig rates for higher specification ultra-deepwater units have flattened, accentuating investment community worries that the steady arrival of newbuild higher specification equipment into the market through 2014 would create excess capacity, at least short term.

Meanwhile, orders for new rigs are approaching six-dozen units year-to-date, exceeding the total orders for 2012. However, most 2013 orders have been for jackup units as opposed to floaters.

The bifurcating market favors companies that offer higher technology specification rigs or younger fleets. Consequently, demand for newer deepwater or ultra-deepwater units exists outside the traditional markets in which the equipment competes.

Legacy offshore equipment has seen its share of troubles lately. Both Ensco and Transocean Ltd. announced they were stacking mid-water units in either Brazil or West Africa during their monthly fleet updates. Ensco mid-water floaters had just 10% of their 2014 contract days booked as of mid-September 2013. Plus, a slew of lower specification mid-water floaters and legacy deepwater units will come back on the market by year-end, providing an economic litmus test of operator interest in legacy equipment.

Elsewhere, financial difficulties have plagued some customers of mid-water equipment such as Brazil’s OGX Petroleo & Gas Participacoes SA, which employs Diamond Offshore Drilling Inc.’s Ocean Quest, a 1,067-m (3,500-ft) semisubmersible. OGX was delinquent on US $22.7 million in payments as of June 30 and owed another $36 million for 3Q 2013, according to Diamond Offshore’s monthly rig fleet status update in mid-September. OGX is fighting to stave off bankruptcy.

While those events appear to be one-off developments, interest in legacy equipment appears to be waning.

“We think preferential demand is already setting in and is most evident by analyzing the characteristics of rigs being used by operators today,” Barclays Capital Ltd. oil services analyst James West noted in the investment banker’s monthly publication Offshore Oracle. “Currently, only roughly 16% of ultra-deepwater rigs are drilling in ultra-deep water. The vast majority of ultra-deepwater rigs are already competing and drilling down market with deepwater and mid-water rigs despite healthy availability for units built to work in those water depths, reflected by utilization rates for deepwater and mid-water rigs in the high 80%s and mid 80%s, respectively.”

West cites operator preference for offshore rigs that can drill wells faster and possess enhanced safety packages in a post-Macondo world.

Barclays estimates 80% of the deepwater fleet is more than 20 years old, presaging future interest in additional newbuilds.

The Noble split should produce a standard specification company that generates $300 million a year and a possible dividend, according to Ryan Fitzgibbon, an analyst with Global Hunter Securities LLC. The new Noble could generate close to $1.3 billion in free cash flow in 2015 “affording it the ability to pay a meaningful dividend given the lack of additional newbuild capex commitments,” Fitzgibbon said in a research report on the deal.

An unspoken driver behind the deal is the pressure on offshore drillers from shareholders to participate in the largesse that rising day rates from increased demand has brought to the sector. Many have invested in newbuild equipment and have been increasing dividends of late or are looking at yield vehicles such as master limited partnerships (MLP), though interest in the MLP structure among contract drillers appears to be waning.

Contact the author, Richard Mason, at rmason@hartenergy.com.

Offshore