Scrap Heap

Legend has it that during a downturn in the oil market in the late 80’s/early 90’s Jim Tisch of Loewes fame assessed the relative valuation of a drilling rig by jumping aboard and proclaiming ” I can buy all of this for $5MM”. The valuations at the time were below actual scrap value, and those purchases would  later form the basis for Diamond Offshore (ticker symbol DO). Fast forward to today where the scrap heap for this type of metal exists on the NYSE where some rig operators are trading at as much as an 80% discount to book.  The movement from deepwater to onshore/ shale combined with a  renaissance in technology just over the last 5-10 years has left a lot of floating and land based steel facing almost sure obsolescence. The question becomes: In a world where credit is endless and virtually without cost, does the question of next best use ever  enter into the equation?. We ask this because Weatherford International filed for bankruptcy protection yesterday,  and it would appear that bankruptcy attorneys will be quite busy in this sector for quite some time. What becomes of the steel we wonder, does the excess ever get scrapped for its possible best use as scrap steel? Or, does the never ending process of workout, de-leveraging, re-leveraging keep this metal “working” in some form in perpetuity.

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