Transocean’s Deal-Making Activity Is A Sign Of Growing Confidence In The Offshore Recovery

by Trefis Team
Transocean Limited
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Earlier this month, Transocean (NYSE:RIG) announced that it planned to acquire offshore drilling contractor Ocean Rig in a cash-and-stock deal valued at about $2.7 billion, as it looks to strengthen its ultra-deepwater fleet ahead of an anticipated recovery in the offshore drilling markets. The deal, which is subject to the approval of shareholders of both companies, comes just about nine months after the company completed its takeover of Songa Offshore, significantly adding to its fleet of harsh environment rigs. Below, we take a look at some of the trends driving the deal and what it could mean for Transocean.

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How The Deal Benefits Transocean

The deal will add a total of nine drillships and two harsh-environment semisubmersibles, which are currently much sought-after, to Transocean’s fleet. Ocean Rig also has two drillships that are presently under construction and due for delivery by 2020. Overall, the deal will boost Transocean’s fleet to 57 rigs, while strengthening its presence in important offshore markets including Brazil, West Africa, and Norway. The company’s contract backlog would increase by about $743 million, bringing the total to $12.5 billion. Ocean Rig has also carried out significant restructuring efforts, slashing its debt and cutting costs, which could make the company more viable for Transocean to run. Transocean has indicated that this deal could help the company better manage its costs per active rig, as it merges Ocean Rig’s operations into its existing structure with an incremental rise in shore-based expenses.

Is The Timing Right?

The offshore markets bore the brunt of the oil downturn, due to collapsing demand for high-cost, long-lifecycle projects and a glut of new high-specification rigs entering the market. For instance, Transocean has seen the average day rates of its most sophisticated ultra-deepwater rigs decline by about 15% over the last three years, with the declines for older rigs being much more severe. While oil prices have moved higher this year, with Brent crude trading at levels of close to $80 per barrel, demand and pricing for offshore rigs haven’t picked up very significantly in the broader market. However, OPEC’s production cuts and the relatively sustained oil price rally appear to have bolstered sentiment in the offshore sector. Transocean for its part has indicated that contracting activity in the ultra-deepwater market will post meaningful improvements in 2019 and 2020, while indicating that day rates for rigs should also see improvements from next year. Research firm Wood Mackenzie has indicated that the ultra-deepwater market may have bottomed out, noting that day rates for high-specification assets could double in the next two to three years.

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