How Will Different Rig Count And Average Daily Rate Forecasts Impact Transocean’s Contract Drilling Revenue In 2016?

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Much like most of its peers, Transocean has been facing a tough time in remaining afloat in the current commodity downturn. The world’s largest offshore drilling contractor has witnessed a notable drop in its revenue as well as profitability due to the slump in exploration and drilling demand worldwide caused by plummeting commodity prices. Consequently, the Swiss company was forced to reorganize its fleet of rigs by scrapping, stacking, and/or making some of its rigs idle. While this helped the company to improve their utilization in 2015, the diminishing contract backlog and falling daily rates are likely to drag down its revenue and cash flows going forward, if the markets do not recover soon.

Based on the company’s guidance and outlook for commodity markets, we forecast Transocean’s annual rig count to average at around 49 rigs in 2016. Further, due to the growing need for improved and cost-efficient techniques of drilling, the pricing pressure in the industry has been on the rise. As a result, we expect the company’s average daily rates to see a drastic fall, and average around $300,000 in 2016. Accordingly, we estimate Transocean’s Contract Drilling Revenue to be approximately $3.4 billion (highlighted in Blue in the table below) during the current fiscal year. However, since annual rig count and average daily rates play a crucial role in the determination of the company’s revenue, a slight deviation from our base case can result in a notable difference in the revenue calculation.

In the table below, we show how different combinations of annual rig count and average daily rates will impact Transocean’s Contract Drilling Revenue in 2016. For instance, a scenario where the commodity markets rebound faster-than-expected in 2016 will lead to a steep recovery in the exploration and drilling demand. Hence, Transocean will expand its fleet of rigs, to say 54 rigs, higher than currently estimated in our base case. In this case, the company’s revenue will be $3.73 billion, 10% higher than the revenue in our base case. However, if this rise in rig count is accompanied by an improvement in the pricing of contracts and Transocean manages to negotiate its contracts at an average daily rate of $350,000 in 2016, its revenue will stand at around $4.35 billion, almost 30% more than the revenue estimated in our base case.

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Have more questions about Transocean (NYSE:RIG)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Transocean

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