Transocean Looks Cheap As It Sells Its Shallow Rigs To Focus On Deepwater

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Transocean (NYSE:RIG), the world’s largest offshore drilling company, announced on Monday that it had entered into ban agreement to sell 38 shallow water rigs to a private equity backed start-up, Shelf Drilling for $1.05 Billion. This deal will significantly reduce Transocean’s exposure to shallow water drilling, which it has been instrumental in pioneering. All of the rigs being sold are located outside North America, and most of them are over 30 years old. Transocean will focus on more lucrative high-specification jackups, deep-water and ultra-deepwater drilling.

In the long term, we believe that the emphasis on higher-specification rigs and ultra-deepwater drilling would have a positive impact on the Average daily revenue per rig as well as Transocean’s EBITDA margins. However in the short term, as a result of the sale, the rig count will be reduced therefore overall revenues may be negatively impacted.

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Focus on deepwater drilling and higher specification Shallow water rigs

According to its filings with the SEC, Transocean is in talks with an integrated oil company concerning the construction of 4 ultra deep drill ships, at a cost of about $3 Billion. These drill ships will be capable of drilling at water depths up to 12,000 feet.

Shallow water drilling, which occurs at depths of less than 500feet, is used for the extraction of oil and natural gas primarily from Mature Wells. While Transocean will still continue to cater to shallow water projects, it will discontinue its standard jackup operation to concentrate on specialized jackup rigs which are much more lucrative.

Shallow water wells are often operated by smaller companies rather than the larger integrated oil firms. The focus on deepwater drilling will enable Transocean to reduce its exposure to smaller customers, allowing it to concentrate on large, deep-pocketed, integrated companies that operate a significant number of deepwater wells. Data provided by Rigzone shows that average day rates for Deep water drilling are more than double those of Shallow water rigs.

Too low a selling price

While we believe that the sale would be a step towards funding Transocean’s ultra-deepwater ambitions and infusing cash needed for the deepwater horizon disaster settlement, there is skepticism in the markets as to whether Transocean may have sold the Shallow water rigs at too low of a price.

According to the Wall Street Journal, analysts at Wells Fargo estimate the value of the shallow water rigs sold to be about $2.2 billion. They estimate that Transocean may report an accounting loss of around $800 to $900 Million on the sale.

We currently have a $55.46 price estimate of  for Transocean, which is about 20% above its current market price.

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