Transocean Still Worth $70 on Offshore Drilling Outlook

Transocean (NYSE:RIG), the world’s largest oil and gas drilling contractor, continues to be dogged by woes nineteen months after the explosion of its Deepwater Horizon rig in the Gulf of Mexico.  The driller’s potential liability for the devastating Macondo oil spill remains uncertain, with legal wrangles continuing in the US courts. ^[1]  In early October 2011 Standard & Poor’s Ratings Services downgraded Transocean to BBB-, citing high debt levels, a weakening operating performance and excess capacity in the deep-sea drilling industry.  There was further bad news in early November 2011, when Transocean was involved in another oil spill off the coast of Brazil.  This much smaller spill has led to concerns of Brazilian government action against the driller, despite Chevron (NYSE:CVX) taking full responsibility for the accident (see our note Chevron Brazil Spill May Result in Fresh Trouble for Transocean). In yet another blow, Moody’s recently announced that it was considering a possible downgrade to junk status for the company’s unsecured debt (see Transocean Flirts with Junk-Grade Rating on Credit Issues).

See Full Analysis for Transocean Here

Stock down over 50% since 2010 spill

The trajectory of the company’s share price over this period has reflected the driller’s troubles.  Trading at $92 just before the catastrophic Deepwater Horizon incident, Transocean shares are now valued by the market at $43 – a drop in value of over 51%. While the company’s share price remains depressed, the outlook for the Offshore Drilling industry as a whole is promising.  Analysts predict a strong upturn in deepwater drilling as oil majors aggressively invest in new production opportunities.  As the leading contract driller in the off-shore oil industry in terms of both the size and the technical specification of its fleet, Transocean should receive a major boost from this trend.

The Trefis price estimate for Transocean’s stock is $70, which is significantly higher than the current market price.  The Trefis estimate assumes that the driller achieves increased rig dayrates and utilization as deepwater oil exploration ramps up over the next few years.

Oil Majors Seeking New Production Opportunities in Deeper Waters

Despite fears of economic weakening in the near-term, analysts are forecasting that high oil prices are here to stay.  With global demand for oil continuing to grow and conventional oil reserves decreasing, oil majors such as Chevron, Royal Dutch Shell, BP (NYSE:BP) and ExxonMobil (NYSE:XOM) have announced large capital investments in upstream exploration and development.

In the search for additional reserves, the major operators are increasingly extending their efforts offshore into the deepwater markets of West Africa, the Gulf of Mexico, Brazil and Asia Pacific.  The deep and ultra-deepwater energy sector has now become one of the major growth areas of today’s oil and gas industry.  Infield Systems predicts that the fastest growth in this sector in the coming years will be in West Africa, where capital expenditure is forecast to double by 2015 driven by the activities of Total, BP and Chevron.  ^[2]  New technology is allowing the oil explorers to operate in both deeper water and harsher environments – including extreme marine and climatic conditions and temperatures.

Transocean’s Fleet Positioned To Benefit From Increased Offshore Activity

As the world’s largest oil and gas drilling contractor, Transocean is positioned to benefit from the increasing emphasis on offshore exploration – particularly in the deepwater and harsh environment sectors in which it specialises and where higher day rates apply.  With a fleet of 135 offshore drilling units, Transocean owns 18% of the global rig fleet. ^[3]

Transocean’s rigs currently command the highest day rates in the industry, reflecting the company’s capabilities in technically demanding sectors and the high-specification character of its fleet.  The highest earning drillship in the industry is Transocean’s Deepwater Champion, which operates in the Black Sea and currently commands a rate of $690k per day.  This is compared to the industry average for this category of floating rig of $455k per day.  ^[4]

As of October 17^th, Transocean reported that 59 units of its fleet were categorized as high specification (27 Ultra-deepwater floaters, 16 deepwater floaters, 7 harsh environment floaters and 9 high specification Jackups).  A further 2 ultra-deepwater floating rigs, acquired as part of Transocean’s strategic acquisition of Aker Drilling in early October, are currently under construction in Korea.

Earnings Drivers – Average Daily Revenues and Utilization Rates

The strength of Transocean’s future earnings will depend on its ability to boost Average Daily Revenues and Utilization Rates across its fleet. The Average Daily Revenues figure gives the expected revenue earned by Transocean each day on a rig under utilization.  Utilization rates represent the total actual number of revenue earning days as a percentage of the total number of calendar days in the period. For the nine months ended September 2011, Transocean reported that the Daily Revenue across its entire fleet was up 4% compared to the prior year.  ^[5]  Given the increased demand for high specification rigs witnessed in the market, this upward trend in Average Daily Revenue is expected to continue.

All of Transocean’s ultra-deepwater and harsh-environment floating rigs are currently under contract.  The percentage of contracted rigs across the entire fleet has increased from 66% in January 2011 to 74% as of October 17^th 2011.  ^[6]

You can drag the trend lines in the modifiable charts above to see the impact of these assumptions and trends on Transocean’s stock value.

This article was submitted as part of our Trefis Contributors program. Join our contributor network and submit a post powered by data and interactive charts.

1. Transocean Turns up the Heat on BP, blogs.wsj.com [↩]
2. Deepwater and Ultra-Deepwater Market Report to 2015, Infield [↩]
3. Rig Report – Offshore Rig Fleet by Manager, Rigzone, 1^st November 2011 [↩]
4. Offshore Rig Day Rates”, Rigzone, 1^st November 2011 [↩]
5. Company Filing [↩]
6. Fleet Status Report, Transocean [↩]