Modeling market valuation of offshore drilling contractors

Abstract

Offshore drilling is big business, and on a worldwide basis, contractor revenues have ranged between $25 and 50 billion a year over the past decade. The industry is organized through public, private, and state-owned companies, and in 2012 public companies Seadrill, Transocean, Ensco, Noble, and Diamond dominated the market, followed by mid-market players Rowan, Hercules, and Aban. The industry is competitive and dynamic, and contractor business strategies evolve in response to changing market demands and competitor activity. Contractors derive their cash flow and earnings by leasing rigs for exploration and development and attempt to maximize their revenue through scale economies, specialization, geographic diversity, and safe and efficient operations. The market value of contractors depends upon their rig fleet, contract backlog, and operational and financial characteristics. Market valuations change as supply and demand conditions change and companies upgrade their fleet portfolio and relocate rigs to satisfy demand. The purpose of this paper is to describe the factors that impact contractor value and to develop quantitative models of market valuation for a cross-section of public firms. A high-level overview of the offshore contract market and business strategies of firms is described. Fleet value, contract backlog, revenue, and earnings are significant predictors of market capitalization and enterprise value, and fleet value is the best predictor of firm value. Keywords Offshore drilling contractors. Fleet value. Valuation modeling 1 Introduction Wells are a primary means to produce reserves, and the only way to create a well is to hire a rig and drill. The first offshore wells were drilled from wharfs off the California coast in 1898 (Grosbard 2002). Drilling moved into swamps and coastal transition zones around the world using barge rigs and submersibles, and in 1947, the first well out of sight of land was drilled 9 miles off the coast of Louisiana. Today, drillships are

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“…The contribution margin is estimated as the dayrate of the contract, minus the cost of the crew which is assumed to be $650 per day per person. We assume a discount rate of 15% in this case study, which is in line with similar industries (Kaiser, 2014). However, we note that for real applications, the choice of discount rate is highly case-and stakeholder-specific, and should be carefully estimated as the results can be highly dependent on this assumption.…”