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Investment Overview for Transocean Limited (NYSE:RIG)
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Below are the key drivers of Transocean's value that present opportunities for upside or downside to the current ${trefisprice}:
Contract Drilling
- Average Daily Revenues: Transocean's average daily revenues are an important driver of the company's value. While daily revenues in certain sections of its fleet are expected to decline, an increasing focus on deepwater and ultradeepwater drilling rigs is expected to increase the overall Average Daily Revenue. Average Daily Revenues are expected to increase to over $440,000 / day by the end of the Trefis forecast period. The increase will primarily be driven by Transocean's shift towards high specification rigs and the increased drilling activity that is expected as oil prices increase on the back of the recovery in global energy demand.In case the demand for offshore drilling increases to such an extent that all excess capacity across segments is utilized and the average daily rate increases by 20% above our forecast, this would provide a 18% upside to our estimate of Transocean's stock. On the other hand if the offshore drilling market weakens and the average daily revenue falls on the back of excess capacity and strong competitive pricing pressures by 20% below our forecast to $353,000, there could be a 25% downside to the ${trefisprice}.
- Utilization: Transocean's rig utilization has declined from 90% in 2008 to 57% in 2011 on the back of reduced drilling activity and excess capacity in the industry. The number recovered to around 78% in 2012 due to stronger drilling activity in the U.S. Gulf Of Mexico. We expect utilization to increase steadily over the next few years on the back of a recovery in the offshore drilling sector as a result of the increasing focus on offshore upstream exploration activity for oil and gas. If offshore drilling picks up as a result of a surge in oil and gas prices to the point that Transocean's rig utilization increases to 90% versus our forecast of 80% by the end of the Trefis forecast period, there could be an upside of 15% to our price estimate. Conversely if the rig utilization decreases to around 70% by the end of Trefis forecast period, there could be a downside of around 15% to the ${trefisprice}
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Transocean Ltd. is the world's largest provider of offshore drilling services for oil and gas wells. It operates one of the most modern offshore drilling fleets in the world. As of 2013, the company operated 82 mobile offshore drilling units including 48 High-Specification Floaters, 25 Midwater Floaters, 9 High-Specification Jackups. The firm also has 6 Ultra-Deepwater Drillships and 3 High-Specification Jackups under construction.
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According to Trefis estimates Transocean's Contract Drilling services are the largest driver of the company's value primarily because of the following trends:
Increasing activity in offshore exploration
Transocean's drilling operations are dependent on the level of activity in oil and gas exploration and the development and production of offshore areas worldwide. Demand for the company's services depends on the activity in the oil and natural gas industry that are directly affected by trends in oil. New discoveries of oil and gas are increasingly shifting offshore and this is is likely to increase revenues for offshore drillers like Transocean.
Shift to high specification rigs
High specification rigs such as ultra-deepwater rigs and harsh environment floaters have higher utilization rates and higher average daily revenues than standard and deepwater rigs. Transocean is increasing its risk towards high specification rigs as the standard segment faces increasing commoditization of services and overcapacity in the market. Transocean has several ultra-deepwater rigs under construction and also has plans to expand its capacity for other high specification services.
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Exploration of deepwater and other remote sources of oil and gas
Over the past few years, major oil and gas finds have increasingly been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these resources adds tremendous logistical and technical complexities to the exploration projects that translate into higher revenues and lower competition for upstream products and services for firms such as Transocean.
Marginal reduction in the number and size of new finds
The IEA estimates that non-OPEC oil production peaked in 2010. This means that future oil and gas finds will get increasingly rarer and the size of the discoveries will decline which will lead to higher exploration and drilling costs to maintain historical output levels of oil.
Excess capacity in the mid-water floater and standard jackup market
The mid water floater and standard jackup market is suffering from depressed pricing and low utilization rates because of excess capacity. Transocean's exposure to these segments has negatively impacted its utilization and average daily revenues.
Competition from land resources
Increasing oil prices have led to the exploration of oil and gas resources in remote areas such as Russia, the CIS, Iraq and Alaska. These efforts divert resources from offshore drilling activity.
Increasing technological complexity in the drilling process
As offshore exploration shifts to demanding locations such as Norway, Greenland, Alaska and Russia and as Deepwater exploration efforts face increasingly difficult terrains, there is a greater demand for high specification rigs. In fact, the utilization rates of high specification rigs was affected only marginally in the downturn.
Trefis Forecast Rationale for Utilization
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The Utilization figure as provided by Transocean is the total actual number of revenue earning days as a percentage of the total number of calendar days in the period. Idle and stacked rigs are included in the calculation and reduce the utilization rate to the extent these rigs are not earning revenues. New builds are included in the calculation upon acceptance by the customer.
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Transocean's ${forecast} declined from around 90% in 2008 to around 63% in 2010 as the decline in drilling activity was compounded by the moratorium imposed by the U.S. Government over drilling activity in the Gulf of Mexico. It remained depressed in 2011 for the same reason. In 2012, utilization recovered to around 78% as the firm divested its fleet of shallow water rigs that had lower utilization rates.
We expect ${forecast} to recover and steadily climb to nearly 81% by the end of the Trefis forecast period given than the company is offloading older,less efficient rigs in favor of higher-specification rigs that have better utilization rates.
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- Shift to high specification rigs
- Transocean is increasing its exposure to high-specification, ultra-deepwater rigs and harsh environment rigs. Rigs in these markets have higher utilization rates.
- Increasing offshore drilling activity
- Increasing oil and gas prices are expected to result in contracting opportunities for all classes in the drilling fleet going forward.
- The U.S. Department of the Interior announced in early 2013 that it intends to auction over 38 million acres of federally owned waters in the U.S. Gulf of Mexico, which would allow oil and gas companies to ramp up their offshore drilling activities in the region. According to the government’s estimates, the area auctioned could produce nearly 1 billion barrels of oil and 4 trillion cubic feet of natural gas.
- Steady midwater activity
- In the Midwater Floater fleet, which includes 25 semisubmersible rigs, customer interest has remained steady, and a near-term increase in activity in the U.K. and India is expected.
- Recent tendering activity may result in the firm's active rigs working beyond their current contracts on a well-to-well basis.
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Trend toward offshore and deepwater exploration
- Over the last 10 years, offshore discoveries account for around 50% of all new oil and gas reserves worldwide.
- It is estimated that offshore oil will cater to 33% of the world’s demand by 2025 with deepwater accounting for approximately 10% of global supply.
- In the case of natural gas, in 2007 an estimated 81% of gas came from onshore rigs. As these fields start to get depleted, it is expected that by 2030 around 40% of gas output will be from offshore sources, indicating a long term shift towards offshore sources and therefore higher pricing.
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- Expanding capacity in the drilling market
- The increase in capacity in 2011 resulting from uncontracted newbuilds and existing units entering or available in the market is expected to negatively impact utilization.
- Uncertainty in the Gulf of Mexico
- Uncertainy surrounding enhanced regulations in the U.S. Gulf of Mexico have the potential to decrease the expected utilization rates as drilling activity may be suppressed by continued delay in issuing new permits.
- Enhanced regulations in the U.S. Gulf of Mexico could result in excess capacity in the mid specifications floaters segment as rigs are reallocated to other projects.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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