Transocean (NYSE:RIG) announced on Monday that a Brazilian judge from the Superior Court of Justice has partially suspended the preliminary injunction order that required the company to stop operating in Brazil within 30 days. Following the partial suspension, the company will be allowed to operate all its offshore rigs in the country except rigs functioning in the Campo de Frade field. The company said that it was perusing all legal options to ensure the complete resolution of the litigation. [1]
The ruling, which came in just a day after the original injunction was served, will come as a relief to Transocean. The company derives about 11% of its revenues from its Brazilian operations and has contracts for 10 rigs in the country.
Brazilian Oil Industry Needs Companies Like Transocean
The move by the court is not surprising, given that government controlled oil firm Petrobras leases 8 of the 10 rigs that Transocean has contracted in Brazil. The revenue loss to the government would have been about 6.71 billion Brazilian reals ($3.3 billion) over two years if Transocean had to cease operations in the country. [2]
Brazil is a booming market for offshore exploration – the country’s rapidly expanding economy and the discovery of large offshore pre-salt deposits could make Brazil one of the world’s largest oil producers. The country has strong demand for deepwater rigs and records rig utilization rates of about 91%, which are among the highest in the world. ((Offshore Rig Utilization By Region, Rigzone))
Since Brazil is still in the early stages of developing its pre-salt oil resources, it needs experienced deepwater players like Transocean to carry out drilling. Pre-salt deposits are oil and gas reserves that lie in pre-salt layers of the earth’s crust. The pre-salt layers lie under thick layers of salt beneath the seabed. They are estimated to carry oil reserves of up to 100 billion barrels. Pre-salt drilling poses considerable technical challenges, due to the depth of drilling and the nature of the carbonatic rock that needs to be penetrated. The deposits lie at over 18,000 feet beneath the ocean’s surface.
Transocean has been progressively relying on deepwater and ultra-deepwater plays to drive growth since this segment of the drilling space commands the best dayrates and the fattest profit margins. We believe that in the long term, the opportunities Brazilian market fit very well into the company’s new fleet strategy. However, in order to arrive at a definitive picture, we will have to wait for the complete resolution of this case.
We have price estimate of $57.32 for Transocean, which is about 24% ahead of its current market price.
Notes:
