How Does The Brazilian Offshore Market Look For Transocean?

Offshore exploration has been growing  in Brazil following promising discoveries of large pre-salt oil deposits off the country’s coast that could transform it into one of the world’s largest oil producers. The number of offshore rigs in Brazil has more than doubled in the last five years to about 45 rigs presently and demand for deepwater rigs  has been strong. Rigs in the country currently record utilization rates of about 94%, which are among the highest in the world. ((Offshore Rig Utilization By Region, Rigzone))

Transocean (NYSE:RIG), the world’s largest offshore drilling contractor, has a significant presence in the Brazilian market with 9 rigs under contract in the country. The firm’s Brazilian revenues stood at around $1 billion last year (over 10% of total revenues). While we believe that the Brazilian market could provide solid long-term opportunities for expansion for Transocean, there are some risks that the firm faces in this region.

Opportunities In The Brazilian Market

Pre-salt Fields Hold Vast Reserves: In 2007, Brazilian oil giant Petrobras made sizable oil discoveries in the Tupi fields (now called Lula fields) at depths of over 18,000 feet below the ocean’s surface under thick layers of salt. Several more large finds were announced in the region in the following years. The Brazilian Petroleum Institute estimates that pre-salt oil reserves could be as high as 100 billion barrels.

There are several technical issues that need to be addressed in producing from pre-salt oil deposits considering the large depths, extreme pressures and the nature of carbonatic rocks that need to be drilled through in order to access these reserves. Since Brazil is still in the early stages of developing its pre-salt oil resources, it will need to rely on experienced deepwater contractors like Transocean to carry out drilling operations.

Deepwater Market: Much of the demand in the Brazilian offshore market is expected to be for deepwater and ultra-deepwater rigs which  Transocean would be in a good position to cater to given that it has been transitioning its asset portfolio away from shallow water rigs to higher specification rigs and deepwater rigs.

Relationship With Petrobras: Petrobras is likely to be a dominant player in pre-salt oil explorations as the Brazilian government has granted the company about 5 billion barrels of pre-salt oil reserves. ^[1] Transocean enjoys a good relationship with Petrobras, Brazil’s dominant oil firm, with 7 rigs under contract with the company, most of which are deepwater and ultra-deepwater floaters. Given that Petrobras intends to invest over $50 billion in developing its pre-salt exploration and production activities, Transocean could see increased demand for its rigs from the company.

Legal Issues And Manpower Shortages Could Prove A Concern

Legal Risks: Last year, a Transocean rig contracted to Chevron (NYSE: CVX) was involved in an oil spill in the Frade field off the coast of Brazil. No one was injured in the incident and Brazil’s oil regulator, the ANP, cleared Transocean of any responsibility relating to the spill. However, Transocean and Chevron continue to fight lawsuits seeking nearly $20 billion in damages.  ((Chevron, Transocean Agree To Change Offshore Brazil Procedures, Reuters))

Manpower Shortages: Brazil lacks the skilled manpower required to staff oil rigs, still largely relying on foreign workers for specialized jobs. Following the Frade oil spill and the ensuing legal proceedings against some employees, foreign workers are becoming more apprehensive about taking up roles in the Brazilian oil industry. While Transocean has undertaken initiatives to develop skills within the region such as building training centers, manpower shortages in the short run could lead to inflation in the firm’s costs as drilling companies compete for skilled labor.

We have a $56 price estimate for Transocean, which is about 20% ahead of the current market price.

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1. Brazil Country Analaysis, EIA [↩]