New Coverage: $86 Trefis Price Estimate for Transocean Ltd.
Transocean Ltd. (NYSE:RIG) is the world’s largest provider of offshore drilling services for oil and gas wells by fleet size as well as by market capitalization. The company operates one of the most modern and versatile mobile offshore drilling fleets in the world and has consistently set industry records in deepwater drilling that have reinforced its position as a niche player in the segment. In addition to drilling services, Transocean also provides provides well and logistics services through its integrated services division and also turnkey drilling solutions, planning, engineering and management services and competes with companies like Noble Corp (NYSE:NE) and Diamond Offshore Drilling (NYSE:DO).
The increasing shift of oil & gas exploration and production efforts to offshore locations and the improving economic viability of deepwater projects due to high crude oil prices are the two important factors that are expected to drive Transocean’s growth in the near future. However, the industry is suffering from excess capacity especially in the standard specifications sector that is driving down fleet utilization levels as well as the pricing of drilling contracts despite the improving demand outlook.
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Transocean is looking to navigate these challenges by concentrating on high specifications sectors such as ultra-deepwater and harsh environment drilling where the competitive intensity is considerably lower.
Coverage Launch; $86 Price Estimate for Transocean Ltd.
We recently launched coverage activity on Transocean Ltd. with a near $86 price estimate for the company’s stock which is a 26% premium over its current trading price.
We have broken down our analysis of Transocean along three operational divisions
In 2010, Transocean earned approximately 94% of its revenues from its worldwide drilling operations and this constitutes 96% of our price estimate. Its operations in the USA contributed to 22% of its overall operating revenues. Operations in Brazil, UK and India contributed to 13%, 12% and 9% of the revenues respectively.
Transocean’s fleet operates in geographies worldwide catering to differing markets such as ultra-deepwater, deepwater, harsh environment, midwater and other offshore drilling segments. Drilling contracts are negotiated on a per day revenue basis and the pricing is largely determined by the available spare capacity in the market.
Drilling Operations
Studies estimate that offshore oil will cater to 33% of the world’s demand by 2025 and supply from deepwater sources will account for approximately 10% of global supply by then. Despite the healthy demand outlook for offshore drilling services, the industry is contending with excess capacity which is slowing recovery in utilization rates and average daily revenues especially in the market for rigs with standard specifications. The recovery has also been affected by the continuing uncertainty regarding the resumption of drilling activity in the Gulf of Mexico following the Macondo incident. Transocean presently has 13 rigs stationed in the Gulf of Mexico. On the other hand, demand for offshore drilling has picked up significantly in Brazil, Middle East and Asia and the North Sea.
We expect utilization rates and average daily revenue figures for Transocean to pick up over the next few years driven by the recovery in demand for offshore drilling and the strategic shift of the company towards high specification drilling. The increasing utilization should also impact the EBITDA margins of the company positively there by improving the overall outlook for the company.