Description

Deep Value Driller is a single-asset Oslo-listed company and a de-risked play on the residual value of a 7th generation UDW drillship (delivered in 2014, just before the offshore market collapsed). The market cap is USD 187 million with approximately 35% free float. However, the opportunity is attractive as the asset is capable of paying a dividend of around 8% p.a. (and still deleveraging), while there should be a special dividend once the ship is sold, leading to an IRR of around 30% over an estimated holding period of approximately 3.5 years.

The company was created in 2021 to buy an idle drillship for 65 USDm or less than 9% of the 750 USDm newbuild cost.

In February 2023, they secured a 3-year bareboat charter (estimated at 985 days for 11 wells, with options for an additional 6 wells) contract with Saipem (ENI subsidiary, thus a high-quality charterer) with a total fixed backlog of approximately USD 160 million. Subtracting the USD 7.5 million mobilization fee, this provides us with around USD 51 million in revenue. The asset has now been reactivated and handed over to the charterer in September. Despite a cost overrun (USD 62 million versus the initial budget of USD 44 million), this is a solid achievement. For comparison, Valaris reported USD 90 million in reactivation costs for its DS 7. As this is a bareboat charter, Saipem will cover the rig operating expenses, resulting in minimal admin expenses and capital expenditure requirements. Thus, DVD should soon be able to start paying dividends. We have estimated the likely dividend by assuming a loan amortization of USD 17 million p.a. over the next three years, as its USD 75 million main credit facility requires a USD 25 million amortization over 18 months (however, only commencing 18 months after the grant). Therefore, we derive an annual dividend potential of 1.9 NOK per share or a yield of just over 8% p.a.

The real attraction of the story, however, lies in collecting a solid 8% yield while waiting for the value of used drillships to reflect the scarcity of the asset. Our base case involves selling the rig after the Saipem contract runs out, approximately in 3.5 years (subject to variation depending on the option). Assuming a sale for 60% of newbuild costs, which would not be unusual even based on pre-COVID transactions, the proceeds from the sale would amount to 48 NOK per share, resulting in a 23% IRR. Adding the 8% dividend yield, this leads to a combined IRR of 31% over the next 3.5 years

Management is aligned, with the supervisory board collectively owning around 10% of outstanding shares. Additionally, the CEO and board together hold warrants for 5% of shares outstanding (8.5 NOK strike, i.e. deep in the money). Following the signing of the charter contract, a board member increased their stake by 1.5 million shares (1.7% of capital), just 15% below the current share price.

The case for increasing rig prices and day rates is thoroughly documented, as highlighted in VIC by 'Kuppy' (hkup881), Taiidea, and on Fintwit by TommyDeepwater (@TommyDeepwater), as well as in various presentations from industry players such as Transocean and Valaris.

In essence, the industry experieced a significant downturn from 2014 to 2018, resulting in the scrapping of a large part of the rig fleet. Currently, utilization is on a strong upward trajectory, with no new supply entering the market. Day rates remain well below newbuild parity, and shipyards have shifted their focus to other areas due to cost inflation and substantial financing costs during construction periods. In a bullish scenario, used rig values might even surpass estimated newbuild costs.

Offshore oil is economically superior to shale, representing a long-cycle investment. The current weakness in oil prices should have minimal impact unless they sustainably drop below US$ 60 per barrel. Recent trends show a consolidation in day rates as the market absorbs the reactivation of previously idle rigs. While this has led to a correction/consolidation in the sector, it does not alter the ultimate destination of 100% capacity utilization and day rates reaching newbuild parity.

Catalyst

Dividend policy

Dayrates