Transocean Ltd.: Complete Fleet Analysis Reveals A Surprising Good Outlook.

Apr.30.14 | About: Transocean Ltd. (RIG)

Summary

Day rates for Transocean Ltd. Updated on April 17, are sending a message of strength and growth, which conflicts from the bleak picture depicted by analysts.

Despite a noticeable general slowdown, Transocean Ltd. is forecasting a day rate increase of about 10% between now and the end of 2015.

As always, personal due diligence is the key to a rational decision. RIG is showing solid growth and it is a Buy.

Introduction.

Transocean Ltd. (NYSE:RIG) is one of the top-tier offshore drilling companies, which owns a very large fleet. As of April 17, 2014, the company released a complete list of its fleet with names, descriptions, contract durations and day rates.

The company owns a total of 27 high specification floaters: Ultra-deepwater rigs; 12 high specification floaters: Deepwater rigs; 7 high specification floaters: Harsh environment; 21 Mid-water floaters; finally, 11 high specification jackups. It is a total of 78 active rig units. Furthermore, 14 more rigs are under construction, at the moment, and scheduled to be coming on-line as early as Q2 2014. (7 are already rented.)

I have written extensively on the Offshore drilling sector recently, and I found that the sector has been quite depressed following a slew of analysts' downgrade, which is mostly exaggerated, in my opinion. The question is, how will day rates fluctuate between 2014 and 2015?

It is not a secret that the offshore drillers are experiencing a market slowdown due to four reasons essentially:

  1. The big oil companies are strategically reducing capital expenditure for 2014 and 2015 in deep-water drilling to curtail in part, an increase in the daily rates, which have been going up too rapidly in 2013. Because of this recent softness, the demand should be lower and offshore drillers should have a difficult time maintaining the actual day rate level, despite a strong crude oil price and an ever-dwindling oil reserve.
  2. The market strength experienced between 2012 and 2013 pushed most of the offshore drillers to build many more rigs than the ones retired in 2014 and 2015. About 27 rigs will be added to the fleet overall. Consequently, the market presents a situation of over-supply, hence putting pressure on day rates. (A basic outcome of an imbalance between demand and supply.)
  3. Offshore drillers will struggle to keep dividends at the same level and may be forced to reduce them in the future. (Analysts view.)
  4. The debt level starts to be a concern if the slowdown keeps pushing the day rates further down.

Since November 2013, I have noticed an increasing number of analysts who downgraded the sector, and I have written an article about this situation recently.

These downgrades were based on the four main arguments indicated above. Their conclusion was that earnings will be weaker than previously estimated, especially until 2016, due to a reduction of revenues estimated around 15%. They added that the Industry high-level dividends may not be sustainable, if revenues are lower and could be cut within two to three years. More negativity was added by talking about the high-debt level of the Industry caught in this slowdown environment.

I believe that the analyst community in general, is not using a totally valid argumentation, and it exploits data incompletely to amplify or even asserts "subjective opinions," probably aggravated, in some cases, by few high-level momentum players. The recent earnings from Diamond Drilling (NYSE:DO), Nobel Corp. (NYSE:NE) and Ensco Plc. (NYSE:ESV) are demonstrating exactly that. These often incomplete arguments that I called "myth" had a severe consequence in the offshore drillers' stock prices, by creating an unjustified adverse momentum. Now we need to find out if the situation is really as described and/or if these companies deserved this deep cut in future price targets?

Here an example from my precedent article:

April 17, 2014: The case of BofA Merrill Lynch about the downgrade of Seadrill (NYSE:SDRL) from "buy" to "neutral" with a target reduced from $46 to $36.
The Economic daily, on April 17, 2014, said that analysts at BofA Merrill Lynch, downgraded SDRL and indicated their reasoning for the downgrade:
"We downgrade Seadrill to Neutral as we are no longer confident the driller can be resilient to the downturn in offshore drilling demand. We reduce utilisation rates for some rigs this year and pull down our dayrate assumptions to US$500k for all ultra deepwater uncontracted capacity. This leads us to cut our earnings by 15% 2014-16E, leaving Seadrill the most expensive offshore driller, trading on a PE of 9.2x15E, a 33% premium. As a result of the cuts our PO falls to NOK215/US$36."

To illustrate my sentiment expressed in my previous article, I will study in depth Transocean Ltd. By using the data available to all of us on their website.

Complete fleet status as of April 17, 2014.

1 - Rigs under construction.

Under construction (14) RIG K feet Contract Start Contract End

Dayrate

K $

1 DeepWater Asgard 12/40 Q2/14 Q2/17 600
2 DeepWater Invinctus 12/40 Q2/14 Q2/17 595
3 DeepWater Thalassa 12/40 Q1/16 Q4/25 519
4 DeepWater Proteus 12/40 Q2/16 Q2/26 519
5 DeepWater Pontus 12/40 Q1/17 Q4/26 519
6 DeepWater Poseidon 12/40 Q2/17 Q2/27 519
7 DeepWater Conqueror 12/40 Q4/16 Q4/21 599
8 JSPL Ultra-deep TBN 1 12/40 TBA - -
9 JSPL Ultra-deep TBN 2 12/40 TBA - -
10 KFELS High Sp Jackup TBN 1 400/35 TBA - -
11 KFELS High Sp Jackup TBN 2 400/35 TBA - -
12 KFELS High Sp Jackup TBN 3 400/35 TBA - -
13 KFELS High Sp Jackup TBN 4 400/35 TBA - -
14 KFELS High Sp Jackup TBN 5 400/35 TBA - -
Click to enlarge

Comment: 7 deepwater rigs are actually rented at a high day rate close to $600k. Only a 10-year or 9-year contract reduced the day rate to $519k.

2 - High specification floaters: Ultra Deepwater.

High Specification Floater

Ultra Deepwater Rigs (27)

7,500'/12,000'-30,000'/40,000'

Year built Ship or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1 Discover Americas 2009 SHIP 3/14 3/16 735 636
2 Discover Champion 2011 SHIP 6/12 11/15 677 665
3 Discover Clear Leader 2009 SHIP 9/9-9/14 9/14-9/18 571/590 503/571
4 Discover Inspiration 2010 SHIP 2/10-4/15 3/15-4/20 527/585 494/527
5 Dhirubhai DW KG1 2009 SHIP 8/09 7/14 510 -
6 Dhirubhai DW KG2 2010 SHIP 3/12 2/15 510 573
7 Discover India 2010 SHIP 9/13-9/16 9/16-11/20 528-508 499-528
8 Petrobas 10000 2009 SHIP 2/11 8/19 435 -
9 Discover Deep Seas 2001 SHIP 10/13 11/16 595 456
10 Discover Enterprise 1999 SHIP 1/14 10/14 615 515
11 Discover Spirit 2000 SHIP 7/12 6/14 557 546
12 GSF C.R Luigs 2000 SHIP 2/14 6/14 580 540
13 GSF Jack Ryan 2000 SHIP 6/09 7/14 445 297
14 Deepwater Discovery 2000 SHIP 1/14 7/14 461 -
15 Deepwater Frontier 1999 SHIP 2/14 8/14 565 534
16 Deepwater Millenium 1999 SHIP 4/14-4/15 4/15-4/16 600-611 570-600
17 Deepwater Pathfinder 1998 SHIP 8/10 4/15 680 560
18 Deepwater Expedition 1999 SHIP 11/12 11/14 650 640
19 Cajun Express 2001 Semi 10/13-11/14 11/14-11/15 600-495 520-600
20 Deepwater Nautilus 2000 Semi 8/12 8/17 533 551
21 GSF Explorer 72/98 SHIP 7/13 7/14 412 -
22 Discover Luanda 2010 SHIP 1/11 1/18 470 -
23 GSF Development Driller I 2005 Semi - - Idle Idle
24 GSF Development Driller II 2005 Semi 11/08 4/14 606 208
25 Development Driller III 2009 Semi 11/09 11/16 428 -
26 Sedco Energy 2001 Semi - - *Idle Idle
27 Sedco Express 2001 Semi 1/13-4/14 4/14-10/14 600/455 500/600
Click to enlarge

*Stacking: An "Idle" rig is between contracts, readily available for operations, and operating costs are typically at or near normal levels. A "Stacked" rig, on the other hand, is manned by a reduced crew or unmanned and typically has reduced operating costs and is (1) preparing for an extended period of inactivity, (2) expected to continue to be inactive for an extended period, or (3) completing a period of extended inactivity. However, stacked rigs will continue to incur operating costs at or above normal operating costs for 30 to 60 days following initiation of stacking.

3 - High specification floaters: Deepwater.

High Specification floater: DeepWater (12)

4,500-7,200'/25,000'

Year built SHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1 Deepwater Navigator 2000 SHIP 5/11 2/16 374 190
2 Discover Seven Seas 1997 SHIP 6/13-7/14 7/14-9/14 500-400 490-500
3 Transocean Marianas 1998 Semi 5/14 3/15 370 -
4 Sedco 706 2008 Semi 4/09 5/14 361 -
5 Sedco 702 2007 Semi 9/12 2/16 461 357
6 Sedco 707 1997 Semi 11/09 11/14 394 188
7 GSF Celtic Sea 1998 Semi 8/13 9/14 328 324
8 Jack Bates 1997 Semi 2/14 5/14 380 525
9 M.G Hulme Jr 1996 Semi 9/11 5/14 190 -
10 Sedco 710 2001 Semi Stacked - - -
11 Transocean Rather 1988 Semi Stacked - - -
12 Sovereign Explorer 1984 Semi Stacked - - -
Click to enlarge

4 - High specification floaters: Harsh environment.

High Specification floater: Harsh environment (7)

1,500'-10,000'/25,000'-30,000'

Year built SHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1 Transocean Barents 2009 Semi 3/14-6/14 8/14-8/15 587 582
2 Transocean Spitsbergen 2010 Semi 7/13 7/15 547 504
3 Henry Goodrich 2007 Semi 10/10 6/15 346-476 381-346
4 Transocean Leader 1997 Semi 3/12 3/15 410 469
5 Paul B. Loyd, Jr 1990 Semi 9/13 3/15 441-447 350-441
6 Transocean Arctic 1986 Semi 9/13 1/16 415-519 423-419
7 Polar Pioneer 1985 Semi 7/14 6/17 620-589 523-620
Click to enlarge

5 - Midwater floaters.

Midwater floater: (21)

1,000'-3,600'/25,000'

Year built SHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1 Sedco 700 1997 Semi Stacked - - -
2 Transocean Legend 1983 Semi 3/12-4/14 4/14-11/14 293-425 300-293
3 Transocean Amirante 1997 Semi Idle - - -
4 GSF Arctic I 1996 Semi Stacked - - -
5 Transocean Driller 1991 Semi 7/10 7/16 264 116
6 GSF Rig 135 1983 Semi 7/13 9/15 365 340
7 GSF Rig 140 1983 Semi 3/12 9/14-Stacked 260 -
8 GSF Aleutian Key 2001 Semi Stacked - - -
9 Sedco 711 1982 Semi 12/13/12/15 6/14-10/15 350-366 275-361
10 Transocean John Shaw 1982 Semi 4/14-12/14 12/14-12/15 361-416 360-361
11 GSF Arctic III 1984 Semi 10/13-4/14 4/14-9/14 336-411 363-366
12 Sedco 712 1983 Semi 10/13-4/16 4/14-10/16 380-409 N/A-403
13 Sedco 714 1997 Semi 10/12-8/15 3/14-2/16 400-445 398-438
14 GSF Grand Banks 1984 Semi 1/13 9/15 409 297
15 Actinia 1982 Semi 6/12 7/15 190 222
16 Sedco 601 1983 Semi Stacked - - -
17 Transocean Winner 1983 Semi 1/13-7/15 7/15-7/16 458-499 495-458
18 Transocean Searcher 1988 Semi 6/12 5/15 396 447
19 Transocean Prospect 1992 Semi 8/13-1/15 5/14-5/15 425-376 252-412
20 J W. McLean 1996 Semi Stacked - - -
21 Sedco 704 1993 Semi 6/13 2/16 374 335
Click to enlarge

6 - High specification Jackups.

High Specification Jackup: (11)

350'/400'-30,000'/35,000'

Year built

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1 GFS Constellation I 2003 9/12 1/16 150 140
2 GFS Constellation II 2004 10/12 7/15 165 109
3 GFS Galaxy I 2001 4/14-10/16 10/14-4/17 216 133
4 GFS Galaxy II 1998 3/14-1/15 6/14-1/15 192-221 190-211
5 GFS Galaxy III 1999 7/13-5/14 5/14-7/17 226-180 146-226
6

Transocean Honor

2012 5/12 4/15 153 -
7 GSF Magellan 1992 5/13 5/14 168 160
8 GSF Monarch 1986 3/14-9/14 9/14-3/15 167-169 164-167
9 Transocean Andaman 2013 5/13 5/16 145 -
10 Transocean Siam Driller 2013 3/13 3/18 139 -
11 Transocean Ao Thai 2013 10/13 9/18 135 -
Click to enlarge

Day rates per quarter in 2014 and 2015.

As we can see the sector in general will enjoy a healthy increase until 2015.

Year

Q1

K $

Q2

K $

Q3

K $

Q4

K $

%

From Q1 2014 to Q4 2015

Ultra-deepwater rig (27) 2014 547 547 564 573 +5.5
Ultra-deepwater rig 2015 563 560 563 560 -0.5
From Q1 14 to Q4 15 +13
Deepwater rig (12) 2014 378 389 374 378 0
Deepwater rig 2015 386 382 377 377 -2.4
From Q1 14 to Q4 15 -0.2
Harsh environment rig (7) 2014 464 474 485 508 +9.5
Harsh environment rig 2015 500 540 553 563 +12.6
From Q1 14 to Q4 15 +21.3
Mid-water floater(21) 2014 345 354 363 370 +7.2
Mid-water floater 2015 370 369 387 395 +6.8
From Q1 14 to Q4 15 +14.5
Jackups (11) 2014 158 166 165 166 +5.1
Jackups 2015 161 159 159 159 -1.2
From Q1 14 to Q4 15 +0.6
Click to enlarge

Numbers of rigs stacked and idle:

Ultra-deepwater Deepwater Midwater floaters
Stacked 0 3 5
Idle 2 0 1
Click to enlarge

Conclusion and recommendation.

It is important to notice that the Transocean day rates for 2014, and 2015 are not decreasing as many have suggested incorrectly. The recent RIG data are showing a healthy increase instead, which represents about 10% between early 2014 until the end of 2015.

Look at the revenue efficiency between Q1 2012 to Q4 2013:

Revenue efficiency

%

Ultra-deepwaters deepwaters Harsh environment floaters Midwater floaters Jackups TOTAL
Q1 2012 89 83.1 97.8 90.6 92.1 89.6
Q4 2013 90 95 92.1 92.3 97.2 91.7
Click to enlarge

Diamond Drilling, Noble, and Ensco Plc. recently confirmed this finding by indicating better earnings overall, surprising higher day rates and high rate of utilization. Seadrill Ltd. and Transocean Ltd. may soon verify this finding as well.

Of course, it is not a homogeneous situation, and some rig types are experiencing a noticeable decrease in day rates while others still enjoy a large increase. As always, it takes a comprehensive and exhaustive analysis to decide on future earnings and revenues. Sometimes a depressed rig sector may boost another; sometimes a low day rate may hide a future deal potential.

It is too simple to use "part of the facts" to try to manipulate a sector down, and I find that rather troublesome. I believe the same arguments have been used from one analyst to another without verifying the basic facts with sufficient rigor.

Transocean Ltd. is about to release its Q1 2014 earnings, and we will get a clearer understanding of this specially confusing situation, where the stock price keeps dropping while the company is posting healthy earnings, and increasing dividends. In fact, RIG should be confirming another increase in dividends announced earlier under Carl Icahn's initiative.

Is it another case of a single tree that is hiding the whole forest?

I am convinced that it has been induced more specifically by analysts who took the "glass half full" day rate situation, with a "glass half empty" attitude.

I continue to believe that the sector is undervalued and has been misrepresented by many analysts these past few months. Crude oil is trading above $100 and demand is still healthy. Big oils companies cannot afford to reduce capital expenditure in the offshore sector for too long, because it is out there only that they will be able to maintain their reserve level. RIG should appreciate another 15% minimum from where it is trading now.

Conclusion: The offshore sector and Transocean Ltd. have been experiencing some weakness these past few months, which should be used to accumulate the company at a discounted price, with a high secured dividend, which should be soon around 7%.

Disclosure: I am long SDRL, RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.