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SHLF: We Think The Market Does Not Fully Appreciate Shelf’s Recent Rig Acquisitions. Second Quarter Numbers As Expected. o This morning, Shelf Drilling (SHLF, Buy) reported second quarter revenues of $151m, which was just short of our $154m expectations, but directionally correct as we had anticipated lower effective utilization. EBITDA was pinned at $47m reported ($49m adjusted), which was very close to the $48m in our model. All in, the net loss was $0.12/share versus our negative $0.07/share due to a somewhat higher tax bill. o The cash position rose to ~$219m up from the $214m in 1Q as a result of the equity raised in conjunction with the acquisition of five vessels from Noble (NE, Buy), which was netted against the deposit both for that quintet and the stand-alone acquisition of the Deep Driller 7.
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o In conjunction with the numbers, the company published a new fleet status report, which shed light on additional fleet adjustments. As previously disclosed, the Shelf Drilling Achiever has been awarded a three-year extension with Saudi Aramco, and in India, the F.G. McClintock and the C. E. Thornton both received new three-year contracts with ONGC. In addition to confirming this, the report revealed that: i) The acquisition of the Deep Driller 7 was completed in July, and the rig was subsequently renamed Shelf Drilling Victory. Reactivation work on the unit has begun (see separate bullet); and that ii) The Compact Driller has secured a new contract with Masirah Oil in Oman from Ocober to December with two option wells thereafter. The total backlog stood at $1.8bn as of end 2Q22, with a weighted average rate of $69k/day and 932 days contracted on average per rig.
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o For the Shelf Drilling Victory, our thesis is that the acquisition was made because the company feels confident in another Aramco-win, based on the tender the NOC has in the market currently. This would also make sense as many of the other Aban sister-rigs have found new Middle Eastern owners recently. In this scenario, we estimate that the cost of reactivating the rig and making the necessary Saudi Aramco Schedule G modifications would be around ~$50m. However, we have already seen several examples of Aramco willingly paying a meaningful part (or all) of the upgrade costs for other drillers, and think it is fair to assume that the operator could cover ~$35m based on these data points. This would, in such a scenario, bring Shelf’s net exposure to around $45m. Further, based on the Saudi awards in 1H, in which dayrates clean approached $110k/day, and the bid levels we think the next round will be at (>$130k/day), annual EBITDA would be between $22m-$29m, and payback on the investment would be less than two years. Based on: i) the payback time versus where Shelf is currently trading on a multiple basis, and ii) the fair (DCF) value of a similar rig, we believe the acquisition is accretive by NOK 4-5/share.
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o For the rigs expected to be acquired from Noble, we also find the transaction highly accretive. According to our estimates, based on our generic DCF framework and multiples, we argue the five rigs are worth somewhere around $600m-$710m. In the high end, this is $335m above the purchase price, of which Shelf Drilling shareholders are entitled to 60%. Consequently, the implied theoretical uplift in market cap should have been around $200m when taking into account the dilution from the $50m equity raised that was carried out when the transaction was announced, or around NOK 11/share. In our view, this has clearly not been priced in, and might instead come as a booster if and when Shelf manages to secure the ~$225m in debt funding that it has targeted to get the deal fully financed. There is also some regulator risk still, with regard to approval from the UK CMA. However, since Shelf Drilling is not involved in the North Sea currently, we are very confident that the CMA will give the green light for the company as a buyer. Closing is expected in October, which would line up with when Noble expects to complete the merger with Maersk Drilling (DRLCO, Buy)
