- 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.
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:
- 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.
- 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.)
- Offshore drillers will struggle to keep dividends at the same level and may be forced to reduce them in the future. (Analysts view.)
- 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|
|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||-||-|
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)
|Year built||Ship or Semi|
|3||Discover Clear Leader||2009||SHIP||9/9-9/14||9/14-9/18||571/590||503/571|
|5||Dhirubhai DW KG1||2009||SHIP||8/09||7/14||510||-|
|6||Dhirubhai DW KG2||2010||SHIP||3/12||2/15||510||573|
|9||Discover Deep Seas||2001||SHIP||10/13||11/16||595||456|
|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|
|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||-|
*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)
|Year built||SHIP or Semi|
|2||Discover Seven Seas||1997||SHIP||6/13-7/14||7/14-9/14||500-400||490-500|
|7||GSF Celtic Sea||1998||Semi||8/13||9/14||328||324|
|9||M.G Hulme Jr||1996||Semi||9/11||5/14||190||-|
4 - High specification floaters: Harsh environment.
High Specification floater: Harsh environment (7)
|Year built||SHIP or Semi|
|5||Paul B. Loyd, Jr||1990||Semi||9/13||3/15||441-447||350-441|
5 - Midwater floaters.
Midwater floater: (21)
|Year built||SHIP or Semi|
|4||GSF Arctic I||1996||Semi||Stacked||-||-||-|
|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||-||-||-|
|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|
|14||GSF Grand Banks||1984||Semi||1/13||9/15||409||297|
|20||J W. McLean||1996||Semi||Stacked||-||-||-|
6 - High specification Jackups.
High Specification Jackup: (11)
|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|
|10||Transocean Siam Driller||2013||3/13||3/18||139||-|
|11||Transocean Ao Thai||2013||10/13||9/18||135||-|
Day rates per quarter in 2014 and 2015.
As we can see the sector in general will enjoy a healthy increase until 2015.
From Q1 2014 to Q4 2015
|Ultra-deepwater rig (27)||2014||547||547||564||573||+5.5|
|From Q1 14 to Q4 15||+13|
|Deepwater rig (12)||2014||378||389||374||378||0|
|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|
|From Q1 14 to Q4 15||+14.5|
|From Q1 14 to Q4 15||+0.6|
Numbers of rigs stacked and idle:
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:
|Ultra-deepwaters||deepwaters||Harsh environment floaters||Midwater floaters||Jackups||TOTAL|
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%.