Mispricing in the Secondhand Market for Offshore Drilling Rigs: A Study of Pricing from 2010 to 2019

Hanna Killingstad

Student thesis: Master thesis

Abstract

This thesis provides an analysis of the pricing on the secondhand market for offshore drilling rigs, an industry and a market with scarce previous research. The industry is dependent on the activity levels of exploration and production companies (E&P), which in turn affects the earnings in the industry, namely the rig dayrate and the fleet utilization, the number of rigs operating on a contract. The pricing in the global secondhand market for purchase and sale of offshore drilling rigs are studied in the period from 2010 to 2019 through an estimated mispricing, which is conducted due to lack of sufficient data. The estimate is calculated as the difference between the transaction price and a fair value estimate of the rig at the time of sale. This fair value is based on the discounted future expected earnings over the remaining economic life of the rigs at the time of sale, following the income model modified by Kaiser (2014) which includes rig specific parameters. Capital expenditures related to extensive maintenance requirements, networking capital and contract values are additionally added to KaiserĀ“s (2014) modification. As there have been found no significant predictor of rig dayrates for more than one period ahead in literature (Adland, et. al, 2013), future rig earnings are based on historical industry performance. The estimated mispricing for 209 transaction samples are compared with market variables over time, including the oil price and rig dayrates. It is found that investors tend to pay above the estimated fair values of the rigs with an oil price above $70 per barrel, and rigs have been sold with a steep estimated discount after the oil price drop from August 2014. These tendencies are further evaluated with comparison of build costs and secondhand prices of rigs sold while under construction, which eliminates the dependence of estimated variables. It is similarly seen tendencies of investors willing to pay a premium for capacity increase in the period between 2011 and 2014, coinciding with high oil prices and dayrates, while rigs under construction was sold with a discount between 2015 and 2019. These tendencies were further tested statistically with OLS regression of the estimated mispricing variable and market variables including the oil price, rig dayrates and fleet utilization. With transformation to stationary variables, no statistical significant results were found, and the market variables can thus not be considered significant predictors of the pricing on the secondhand market.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages102