The Impact Of New US Offshore Drilling Plan On Transocean’s Value

Transocean (NYSE:RIG) seems to have entered 2018 on a great note. The recent news about President Trump’s proposal to open up a majority of the US coastline for offshore drilling comes as a sea of water in a desert for Transocean. If implemented, this proposal will unlock vast oil and gas reserves off the shores of the US coast, which will significantly boost the demand for offshore drilling services and equipment. Being the largest offshore drilling contractor, Transocean is set to benefit largely if the proposal becomes a reality. In fact, the company’s stock has already shot up by 10% since the beginning of the year, as investors expect the company to gain from this new plan. Thus, in this note we aim to determine the upside that the implementation of this proposal could have for Transocean in the next few years using our interactive platform. We currently have a price estimate of $11 per share for Transocean, which is slightly lower than its market price.

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Soon after the dawn of 2018, the Trump administration has released its long-awaited offshore drilling proposal, which will replace the existing leasing schedule. The new plan is expected to conduct 47 individual lease sales between 2019 and 2024, opening up Arctic waters and millions of acres offshore the US coast line for oil and gas drilling. At present, only 6% of the US oil and gas reserves are available for drilling. However, with the new proposal, the Trump administration aims to open up reserves of roughly 90 billion barrels of oil and 319 trillion cubic feet of natural gas for drilling, which is almost 80% higher than that currently available. The new drilling plan is aimed at enhancing domestic energy production, which will, in turn, boost the country’s overall economy. However, there are several hurdles, such as protests from coastal states, environmentalists, and the tourism industry, that the bill will have to cross before it becomes a reality.

That said, let’s assume that the new offshore drilling proposal is implemented in the coming months. This would imply that the demand for offshore drilling services and equipment is likely to surge from 2019 onward, causing the offshore rig count to go up. Consequently, we expect Transocean’s annual rig count to shoot up notably from 2019 onward, shown in the graph above (blue dotted line). This is expected to be much higher than the rig count of the company in our base case (thin solid line).

Apart from boosting the rig count, and in turn revenues, this new plan is likely to ease off the current pricing pressure in the offshore industry, as demand picks up. This will provide Transocean a higher bargaining power to negotiate new contracts at higher average dayrates, which will further magnify its top-line growth. We show this surge in daily revenue in the chart above. When combined with the rise in rig count, the higher pricing will lead to a significant jump in Transocean’s revenues. As a result, the company’s stock price is expected to increase. Based on our estimates, we have a price estimate of $11 per share for Transocean. However, based on this upside scenario, the company’s price is expected to jump to almost $14 per share, representing an upside of more than 25%. 

Feel free to create your own scenarios and estimates about the impact of the offshore drilling plan on Transocean’s price using our interactive platform.

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