Deepwater is becoming an increasingly important focus area for oil companies worldwide given the massive potential reserves and the technological advances that are making exploration and production more viable. We believe that Transocean (RIG) is one of the companies that is best posed to benefit from increasing deepwater and ultra-deepwater activity given its strong asset base and contract backlog.
Deepwater Demand Will Grow At A Steady Clip
Activity in the upstream space is largely driven by the outlook for oil and gas prices, which in turn influence the capital expenditures of oil companies. Crude oil prices have seen some stability over the last few years with Brent crude prices largely ruling at above $100 per barrel while natural gas prices have also been on the rise in most parts of the world barring North America.  Worldwide oil demand is also expected to see some moderate growth rising from an about 91 million barrels per day (MMb/d) in 2013 to close to 93 MMb/d by 2015. These higher prices could enhance the return on investments for projects and increase the incentive for oil and gas companies to participate in more expensive and challenging plays, such as deepwater and ultra-deepwater.
In 2012, around 28% of new offshore discoveries (in terms of volumes) came from deepwater plays while around 49% came from ultra-deepwater plays. (Transocean Presentation) According to consulting firm Wood Mackenzie, the number of deepwater exploration, appraisal, and development wells drilled each year is expected to increase from around 500 per year in 2012 to close to 1,250 per year in 2022. The outlook for deepwater spending also looks promising. Expenditures are expected to rise from around $43 billion in 2012 to close to $114 billion in 2022, translating to a growth of close to 10% per year.  The higher drilling activity will bode well for demand for offshore drilling rigs. To meet the demand an additional 95 deepwater rigs will need to be constructed between 2016 and 2022. (Offshore-Mag)
How Transocean Benefits
Significant Exposure To The Deepwater Space: Transocean has largely transformed itself into a deepwater and ultra-deepwater focused company following the sale of its fleet of 38 low-specification jack-up rigs last year. The company now derives close to 68% of its revenues from its deepwater and ultra-deepwater assets. The company has a total contract backlog of close to $27.3 billion, and about 70% of the contract backlog comes from its ultra-deepwater rigs alone.  There were a total of around 128 ultra-deepwater floaters worldwide as of March 2013, and Transocean is the single largest operator with around 29 ultra-deepwater rigs (over 20% of the global fleet). The company will also be adding another 6 ultra-deepwater drill ships to its fleet between 2014 and 2017. Seadrill (SDRL), the second largest ultra-deepwater operator, currently has around 15 ultra-deepwater rigs.
Margins, Capital Efficiency Will Improve: With the sale of its low specification shallow water rigs, Transocean has been downsizing its shore-based support infrastructure to account for the smaller overall rig count. The cost reductions will entail streamlining and consolidating some business functions as well as eliminating some of the company’s non-core operations. The company anticipates that these initiatives could help to achieve annualized savings of around $300 million beginning in FY2014. The deepwater focus will also have a very positive impact on Transocean’s capital efficiency. Transocean’s ultra-deepwater rigs have average day rates of above $500,000, which is significantly higher than the rest of the company’s fleet. Additionally, the ultra-deepwater rigs are also among the company’s most productive assets since they have a revenue efficiency of around 92% with utilization rates of around 96%. Utilization rates are a ratio of the number of rigs working on contract to the total number of rigs. Revenue efficiency is a measure of how much revenue a rig actually earns on contract versus the maximum that it could potentially earn.
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