Over the past couple of years, Transocean (NYSE:RIG) has been focusing on the deepwater and ultra-deepwater segments of offshore drilling in order to boost its day rates. However, high oil prices are fueling a resurgence in shallow water drilling in the U.S. Gulf of Mexico as small exploration and production companies look to exploit new technology to coax more crude oil out of the region’s reserves.  Industry data suggests that day rates as well as utilization levels for rigs in the region have increased since the beginning of last year. Higher exploration activity can also boost revenues for oilfield services providers such as Schlumberger (NYSE:SLB), which provide technology to increase production from aging fields.
We have a $58 price estimate for Transocean, which is at a 15% premium to its current market price.
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High oil prices have lured a number of small and medium-sized oil companies such as Houston-based Energy Partners and multinational Apache Corp. to explore the mature fields in the GoM shelf.  Renewed interest in the fields has pushed up day rates on drilling rigs and RigData Offshore suggests that the shallow water rig count in the region has jumped by 32% over January 2011 lows. Hercules Offshore has reported that its day rates have doubled in the period. According to its January 2012 fleet status report, Transocean has 49 standard jackups, 9 high specification jackups and 25 midwater floaters and almost none of these ships are operating in the U.S. GoM. 
Transocean has looked to reduce its exposure to the shallow and midwater segments of the offshore drilling market because of higher competition, lower utilization levels and low day rates. However, the revival in the U.S. GoM shelf – and possibly other shallow shelves as a result of changing economics – could force the company to rethink this strategy.
While day rates in deepwater drilling are higher, the sector is subject to stricter regulations following the Macondo spill and other incidents. Presently, the uptrend in exploration and production activity in the GoM shelf could positively impact the company’s day rates as well as utilization levels, adding significant upside to our price estimate for its stock.
- Transocean Estimate Revised to $58 on Weak Revenue Growth, Margins (trefis.com)
- Transocean’s Value Proposition: Leading Driller Stays Afloat By Going Deepwater (trefis.com)
- Transocean Serious About Shedding Older Rigs (blogs.wsj.com)