Transocean's troubles continue after Deepwater crisis

The drilling contractor could achieve increased rig dayrates and utilization as deepwater oil exploration ramps up over the next few years.

By Trefis Dec 2, 2011 3:24PM
Image: Oil drilling platform (© Scott Gibson/Corbis)Transocean (RIG), the world's largest oil and gas drilling contractor, continues to be dogged by woes 19 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 U.S. courts. In early October, Standard & Poor's downgraded Transocean to BBB-minus, 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, when Transocean was involved in another oil spill off the coast of Brazil. This was a much smaller spill, but has led to concerns about the Brazilian government's action against the driller, despite Chevron (CVX) taking full responsibility for the accident (see Chevron Brazil Spill May Result in Fresh Trouble for Transocean). In yet another blow, Moody's recently announced 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 Trefis 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 were at $43.16 Friday afternoon -- a drop in value of more than 50%. 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 seek production opportunities


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, British Petroleum (BP) and ExxonMobil (XOM) have announced large capital investments in upstream exploration and development.


In 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. 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


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 specializes and where higher day rates apply. With a fleet of 135 offshore drilling units, Transocean owns 18% of the global rig fleet.


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 $690,000 per day. This is compared to the industry average for this category of floating rig of $455,000 per day.


As of Oct. 17, Transocean reported that 59 units of its fleet were categorized as high specification (27 Ultra-deepwater floaters, 16 deepwater floaters, seven harsh environment floaters and nine high specification Jackups). A further two 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 revenue 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 prior year. Given the increased demand for high specification rigs witnessed in the market, this upward trend in average daily revenue is expected to continue.


Transocean Drilling Average Daily Revenues

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 Oct. 17.


Transocean Drilling Utilization

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.


11Comments
Dec 3, 2011 3:38AM
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Wrong on all counts, do you drive a solar car or heat your home with solar. If you want to write me a check for the increased cost, then I am for it. If not drill for more oil and let's power America.
Dec 3, 2011 7:09AM
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Solar has some potential, as does wind and hydro for electrical power generation .. but could you imagine a wind turbin on every building in New York City?Thinking  The state of art for large scale renewable energy has not become cost effective (yet), because we still need oil, gas, coal or nuclear back up power to meet the energy needs .. when the sun don't shine and wind don't blow.
Dec 3, 2011 7:23AM
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Linda Brown .. hopefully, Transocean & BP model for "dealing with the situation" isn't following the script of Exxon Valdez litigation, because it has took more than 20 years for the hard feeling to subside here in Alaska.  Safety First and responsibility for any damage should top the list above corporate profits.
Dec 3, 2011 9:03PM
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if people would embrace electric cars on a grand scale we could start the process of moving off oil and unto solar and natural gas powered charging also better batteries and longer ranges would be invented so sad we still are beholden to big oil who rips us off by speculating price to over 40% above actual supply demand and uses fear to acomplish this
Dec 2, 2011 10:58PM
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Good article.  More of a positive outlook for 2013 and beyond, instead of focusing on the doom and gloom of the present.  After the court date for Macondo in February 2012 and the actual numbers are made public, that will be behind them and they can move on.  The media attention will also die down shortly after that.  ExxonMobile had to deal with similar with the Valdez incident, but they got past the negative and are still going strong.

Dec 3, 2011 2:48PM
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OIL IS SOOOO DIRTY, BUT WE NEEEED IT, KEEP DRILLING..

Dec 3, 2011 10:30AM
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The whole infrastructure is based on oil. As long as there is money to be made on oil nothing will change, besides alternative energy sources aren't developed enough to replace oil, and there isn't enough money in it to make it worthwhile. When the oil companies can't make big money on oil then they will probably be the ones that will develope the alternative energy sources that will replace oil. The enviornmentalists can scream all they want to, but nothing will change. As far as I am concerned they're the biggest hypocrits there are. They drive cars, use toilet paper, live in houses, which involves petroleum products to build, drive on roads, made with petroleum products in the paving process, etc. So there you have it, The system will rely on petroluem products for a long time to come, until changed is forced on it.
Dec 3, 2011 4:44PM
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excess capacity in the deep-sea drilling industry.

Gee, I wonder if that could have anything to do with the fact that Obama decided to put a moratorium on the industry??   Unless, of course you're the Brazilians, then we'll give you billions and gush that we want to be your best customer,   Or unless your Chinese, then you can drill off of Cuba.  

 

But hey, if you're an American, then the Obama administration is going to do everything in it's power (like the recent pipeline deal) to make sure that America remains as dependent as possible on everyone else, and that no jobs, paying good wages, are created by that eeeevil oil industry.

 

Dec 3, 2011 1:35PM
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Sounds like this author has money invested in RIG.  I put my money into another deepwater driller, SDRL.  Nice dividend, & fairly cheap entry price if you want to invest in this segment. SDRL is a Norwegian company, that has the newest rigs out there, & is gaining market share from RIG. 
Dec 3, 2011 3:20AM
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How about put more focus on renewable energy sources instead.  The world needs to focus on better energy sources that won't ruin the environment and don't run out!!!! 

 

Solar Energy anyone? 

Dec 3, 2011 3:18AM
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ugh.  Oil is the root of so much evil.
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