KCADeutag - reducing margin for extended contracts?

All,

Assuming the North Sea contracts are extended for additional 2 years, plus the 5 years on the 3 Russian rigs, this equates to 19 rig years. The headline $550m of revenue implies a $29m revenue per rig, which appears high versus historical levels of c. $20m per rig.
Two reasons could explain the higher rate per rig rates. One, contracts in Russia tend to include significant additional auxiliary services at low margins which distort the headline revenue numbers. The second reason is the overall contract of $550m includes years on the North Sea rigs which were already contracted but are now part of a longer contract, increasing the number of rig years. This second hypothesis is likely to be a reduction in day rates versus previously contract.

Conclusion
The new contract in Russia is definitely a positive and if, as expected, implies an additional rig is operational will undoubtedly increase margins. The extensions in the North Sea should be seen as neutral. They might have been achieved by reducing day rates, but the additional years should outweigh the reduction in margins.

Background
KCA Deutag released a statement yesterday confirming recent contract wins in both Russia and the North Sea. The Russian contract is with a new customer, securing a 5yr contract (with extension options) for three rigs. Additionally, the North Sea team have secured two contract extensions on existing contracts. The overall contract size is $550m of revenue.

Rigs:
This is a contract for 5 rigs (3 Russian and 2 North Sea). The contract for the 3 rigs in Russia that they previously maintained for Sakhalin Energy Investment Company was due to end in May 2021 so although not confirmed, this is likely to be the resumption of these rigs. Historically, only 2 out of the 3 rigs were operating, implying an additional rig operational, which is higher margins.

None of the North Sea rigs were due for extensions, so the extension could be as a result of a rate renegotiation (downwards/lower margin for KCA).

Positioning
We maintain our 2.5% of NAV long bond position and 2.5% of NAV long restructured equity position,

Happy to discuss.

Tomás
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