Statoil Contracts Could Cause An Upside To Transocean’s Near Term Price

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Despite the steady recovery in commodity prices during 2017, the offshore drilling markets have continued to remain on the back-burner. As a result, Transocean (NYSE:RIG), being the world’s largest offshore drilling company, has not fared well through the year, as investors continue to be wary about its declining contract backlog and dayrates. However, the driller’s announcement, earlier this week, that it received a 22-well contract with Statoil with an estimated duration of 33 months, indicates that the company might be on the verge of a rebound. In this article, we discuss the implications of the new contract on Transocean and its near term value. We have a price estimate of $11 per share for Transocean, which is 10% higher than its current market price.

See Our Complete Analysis For Transocean Here

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New Contract Details

Earlier this week, Transocean announced that its harsh environment semi-submersible, Transocean Spitsbergen, has been awarded a 22-well contract with Statoil Petroleum ASA for an estimated duration of 33 months [1]. The contract would have an estimated backlog of $286 million, and is expected to commence work in the third quarter of 2019. Additionally, the award also includes two one-well options to work with the Norwegian integrated energy company in the future. While the value of these options is difficult to estimate at the moment, it implies that the company will have an upside to its price, in case these two options are exercised anytime in the future.

What It Means For Transocean

In the current environment, when a majority of the offshore drillers are struggling to win new contracts, Transocean’s latest contract win comes as a positive news for the company. This is because we believe that the company’s decision to acquire Songa Offshore, announced in the third quarter of this year, for a total consideration of $3.4 billion, has paid off. Although the implicit rationale of the deal was to augment the company’s dwindling top-line by adding $4.1 billion of contract backlog to its existing portfolio, the more crucial objective was to enhance the company’s presence in the North Sea region.

Over the last few years, the North Sea has become one of the most desirable offshore markets, with a number of contracts being awarded in the region despite the weakness in global markets. With the Songa deal, which is expected to be  completed in early 2018, Transocean would acquire four “Cat-D” harsh environment semi-submersible drilling rigs on long-term contracts with Statoil in Norway, and three additional semi-submersible drilling rigs that are currently idle. Given that the company would be working closely with Statoil on its existing contracts post the deal, it had expected to attract additional work for its currently stacked or idle rigs, which would boost its contract backlog. This is exactly what happened, when Transocean’s harsh environment semi-submersible, Transocean Spitsbergen, which is already contracted with Statoil until October 2018, won the  22-well contract. Thus, it is fair to say that the company’s strategy to expand its presence in the North Sea with the Songa deal has worked in its favor.

Furthermore, the harsh environment segment is one of the few segments that is showing positive signs of recovery, and is actually generating profits for drillers. In fact, Transocean’s harsh environment segment is fully contracted except the semi-sub Polar Pioneer, which is stacked since December 2015. This implies that while the dayrate for the newly awarded contract may seem relatively small, it has a built-in profit component, which will bolster Transocean’s performance in the near term. Below, we present our estimate for Transocean’s revenue for the next few years. Feel free to create to your own scenarios and visualize its impact on the company’s stock price.

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Notes:
  1. Transocean Announces 22-Well Contract, 21st December, www.deepwater.com []