Transocean Is Taking A $520 Million Write-down. Is There More To Come?

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Offshore drilling major, Transocean (NYSE:RIG), indicated that it would be retiring three of its drillships and one semi-submersible rig, as the offshore drilling market grapples with oversupply and weak contracting activity, limiting the uptake of older rigs. The company will take a $520 million charge in the second quarter, relating to this. In this note, we take a look at why Transocean had to retire these rigs and why there appear to be more candidates for retirement from the company in the near-term.

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The drillships that Transocean intends to retire include its Deepwater Discovery (built in 2000), Deepwater Frontier (1999) and the Deepwater Millennium (1999). The Songa Trym semisubmersible (built in 1976), which was acquired as part of the company’s acquisition of Songa Offshore, will also be retired. While the drillships are all over 17 years old, these rigs are typically designed to stay in operation for upwards of 30 years, implying that they still have a considerable remaining useful life and book value. However, the retirement will only result in a non-cash charge for Transocean and will not impact the company’s financials or cash flows.

Why There Could Be More Retirements In The Offing

While oil prices have moved higher, with Brent crude at levels of around $74 per barrel, demand and pricing for offshore rigs haven’t picked up very significantly in the broader market, except for some pockets such as the North Sea, where Transocean recently increased its exposure via its acquisition of Songa Offshore. There has been a significant oversupply of rigs in the global markets, meaning that upstream companies can engage newer and more advanced rigs at competitive prices, limiting the need for older and less sophisticated rigs. According to research firm Bernstein, the market is oversupplied to a point that even rigs that were built between 2006 and 2012 could struggle to find work. Moreover, with the downturn in oil prices over the last three years, land-based oil drillers have undergone a lot of belt tightening, meaning that they can produce oil at lower costs, potentially limiting the need for more expensive offshore-based drilling activity.

Transocean, for its part, has indicated that it continues to evaluate the long-term competitiveness of its fleet, meaning that additional rigs could be identified as candidates for retirement. The company appears to have another four drillships ripe for retirement, including the Discoverer Deep Seas (built in 2001) which has been stacked over the last two years and the Discoverer Enterprise (1999), Discoverer Spirit (2000), and GSF C.R. Luigs (2000), which have all been stacked for almost three years. This could potentially result in another meaningful write-down for the company in the interim.

 

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