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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)RIGK feetContract StartContract End

Dayrate

K $

1DeepWater Asgard12/40Q2/14Q2/17600
2DeepWater Invinctus12/40Q2/14Q2/17595
3DeepWater Thalassa12/40Q1/16Q4/25519
4DeepWater Proteus12/40Q2/16Q2/26519
5DeepWater Pontus12/40Q1/17Q4/26519
6DeepWater Poseidon12/40Q2/17Q2/27519
7DeepWater Conqueror12/40Q4/16Q4/21599
8JSPL Ultra-deep TBN 112/40TBA--
9JSPL Ultra-deep TBN 212/40TBA--
10KFELS High Sp Jackup TBN 1400/35TBA--
11KFELS High Sp Jackup TBN 2400/35TBA--
12KFELS High Sp Jackup TBN 3400/35TBA--
13KFELS High Sp Jackup TBN 4400/35TBA--
14KFELS High Sp Jackup TBN 5400/35TBA--

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 builtShip or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1Discover Americas2009SHIP3/143/16735636
2Discover Champion2011SHIP6/1211/15677665
3Discover Clear Leader2009SHIP9/9-9/149/14-9/18571/590503/571
4Discover Inspiration2010SHIP2/10-4/153/15-4/20527/585494/527
5Dhirubhai DW KG12009SHIP8/097/14510-
6Dhirubhai DW KG22010SHIP3/122/15510573
7Discover India2010SHIP9/13-9/169/16-11/20528-508499-528
8Petrobas 100002009SHIP2/118/19435-
9Discover Deep Seas2001SHIP10/1311/16595456
10Discover Enterprise1999SHIP1/1410/14615515
11Discover Spirit2000SHIP7/126/14557546
12GSF C.R Luigs2000SHIP2/146/14580540
13GSF Jack Ryan2000SHIP6/097/14445297
14Deepwater Discovery2000SHIP1/147/14461-
15Deepwater Frontier1999SHIP2/148/14565534
16Deepwater Millenium1999SHIP4/14-4/154/15-4/16600-611570-600
17Deepwater Pathfinder1998SHIP8/104/15680560
18Deepwater Expedition1999SHIP11/1211/14650640
19Cajun Express2001Semi10/13-11/1411/14-11/15600-495520-600
20Deepwater Nautilus2000Semi8/128/17533551
21GSF Explorer72/98SHIP7/137/14412-
22Discover Luanda2010SHIP1/111/18470-
23GSF Development Driller I2005Semi--IdleIdle
24GSF Development Driller II2005Semi11/084/14606208
25Development Driller III2009Semi11/0911/16428-
26Sedco Energy2001Semi--*IdleIdle
27Sedco Express2001Semi1/13-4/144/14-10/14600/455500/600

*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 builtSHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1Deepwater Navigator2000SHIP5/112/16374190
2Discover Seven Seas1997SHIP6/13-7/147/14-9/14500-400490-500
3Transocean Marianas1998Semi5/143/15370-
4Sedco 7062008Semi4/095/14361-
5Sedco 7022007Semi9/122/16461357
6Sedco 7071997Semi11/0911/14394188
7GSF Celtic Sea1998Semi8/139/14328324
8Jack Bates1997Semi2/145/14380525
9M.G Hulme Jr1996Semi9/115/14190-
10Sedco 7102001SemiStacked---
11Transocean Rather1988SemiStacked---
12Sovereign Explorer1984SemiStacked---

4 - High specification floaters: Harsh environment.

High Specification floater: Harsh environment (7)

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

Year builtSHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1Transocean Barents2009Semi3/14-6/148/14-8/15587582
2Transocean Spitsbergen2010Semi7/137/15547504
3Henry Goodrich2007Semi10/106/15346-476381-346
4Transocean Leader1997Semi3/123/15410469
5Paul B. Loyd, Jr1990Semi9/133/15441-447350-441
6Transocean Arctic1986Semi9/131/16415-519423-419
7Polar Pioneer1985Semi7/146/17620-589523-620

5 - Midwater floaters.

Midwater floater: (21)

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

Year builtSHIP or Semi

Contract

Start

Contract

End

Current

Dayrate

K $

Previous

Dayrate

K $

1Sedco 7001997SemiStacked---
2Transocean Legend1983Semi3/12-4/144/14-11/14293-425300-293
3Transocean Amirante1997SemiIdle---
4GSF Arctic I1996SemiStacked---
5Transocean Driller1991Semi7/107/16264116
6GSF Rig 1351983Semi7/139/15365340
7GSF Rig 1401983Semi3/129/14-Stacked260-
8GSF Aleutian Key2001SemiStacked---
9Sedco 7111982Semi12/13/12/156/14-10/15350-366275-361
10Transocean John Shaw1982Semi4/14-12/1412/14-12/15361-416360-361
11GSF Arctic III1984Semi10/13-4/144/14-9/14336-411363-366
12Sedco 7121983Semi10/13-4/164/14-10/16380-409N/A-403
13Sedco 7141997Semi10/12-8/153/14-2/16400-445398-438
14GSF Grand Banks1984Semi1/139/15409297
15Actinia1982Semi6/127/15190222
16Sedco 6011983SemiStacked---
17Transocean Winner1983Semi1/13-7/157/15-7/16458-499495-458
18Transocean Searcher1988Semi6/125/15396447
19Transocean Prospect1992Semi8/13-1/155/14-5/15425-376252-412
20J W. McLean1996SemiStacked---
21Sedco 7041993Semi6/132/16374335

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 $

1GFS Constellation I20039/121/16150140
2GFS Constellation II200410/127/15165109
3GFS Galaxy I20014/14-10/1610/14-4/17216133
4GFS Galaxy II19983/14-1/156/14-1/15192-221190-211
5GFS Galaxy III19997/13-5/145/14-7/17226-180146-226
6

Transocean Honor

20125/124/15153-
7GSF Magellan19925/135/14168160
8GSF Monarch19863/14-9/149/14-3/15167-169164-167
9Transocean Andaman20135/135/16145-
10Transocean Siam Driller20133/133/18139-
11Transocean Ao Thai201310/139/18135-

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)2014547547564573+5.5
Ultra-deepwater rig2015563560563560-0.5
From Q1 14 to Q4 15 +13
Deepwater rig (12)20143783893743780
Deepwater rig2015386382377377-2.4
From Q1 14 to Q4 15 -0.2
Harsh environment rig (7)2014464474485508+9.5
Harsh environment rig2015500540553563+12.6
From Q1 14 to Q4 15 +21.3
Mid-water floater(21)2014345354363370+7.2
Mid-water floater2015370369387395+6.8
From Q1 14 to Q4 15 +14.5
Jackups (11)2014158166165166+5.1
Jackups2015161159159159-1.2
From Q1 14 to Q4 15 +0.6

Numbers of rigs stacked and idle:

Ultra-deepwaterDeepwaterMidwater floaters
Stacked035
Idle201

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-deepwatersdeepwatersHarsh environment floatersMidwater floatersJackupsTOTAL
Q1 20128983.197.890.692.189.6
Q4 2013909592.192.397.291.7

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%.

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