Transocean In Deepwaters?

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RIG: Transocean logo
RIG
Transocean

The dark clouds of troubles hovering over Transocean (NYSE:RIG) have just grown darker. The world’s largest offshore drilling contractor has been dragged into the federal probe against Petrobras (NYSE:PBR), the Brazilian integrated energy company, for charges of corruption. A former executive of the Brazilian state-run oil company has testified that in late 2007 he was offered payments (commission) from an alleged person named Carlos Moura, claiming to be an agent of Transocean, to obtain a rig operation contract from Petrobras. The company has denied the charges and has offered to cooperate with the federal authorities during the investigation. However, the denial has not been strong enough to prevent the investors from penalizing the company’s stock, which fell more than 10% within two days of the release of the transcript of the testimony. While it is difficult to comment on the merit of the charges against Transocean, the news will surely prove to be detrimental for the company and its stock.

RIG-Sept

Source: Google Finance

On a separate note, the Swiss company’s contract backlog has remained depressed even in the month of September. According to the September Fleet Update, Transocean could not win any new contracts during the month. Over the last three months, the company has managed to add merely $44 million worth of new contracts or contract renewals to its existing backlog. In our previous article about the company – “Transocean Suspends Dividends – Desperate Times, Desperate Measures?”, we had elaborated on how the offshore driller’s contract backlog, as well as day rates, have declined in the first half of the year. If the company’s backlog continues to diminish at the current rate, we expect to see a meaningful decline in its revenue over the next few quarters.

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RIG-CB

Source: Transocean 2Q Form-10Q

To further add to the miseries of the company, Royal Dutch Shell Plc. (LON:RDSA), that had contracted Transocean’s Polar Pioneer rig to undertake exploration activities in the offshore Alaska region in the Arctic Basin, has announced its plans to indefinitely discontinue the exploration and write off approximately $4.1 billion due to the failure to discover enough oil in the region. The decision makes perfect sense for Shell as it will eliminate the high project cost, amidst the uncertain oil price environment. The market expects Transocean to receive a lump sum payment for the early termination of the rig contract, which would have otherwise expired in 2017, since there are no alternative locations where the company can relocate this rig. While this will provide a boost to the offshore driller’s cash flows in the near term, it could weigh heavily on the company’s contract backlog and, in turn, on its revenues. Thus, we foresee a tough road ahead for Transocean. We currently have a price estimate of $15 per share for the company.

See Our Complete Analysis For Transocean Here

 

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