Is Transocean A Good Investment?

| About: Transocean Ltd. (RIG)


The change in the strategy should allow the company to reduce costs, as well as enhance profitability and cash flows.

Securing new contracts for the out-of-contract rigs might pose some troubles for the company.

Average day rates for Transocean remain strong, despite a slowdown in the offshore drilling sector.

The offshore drilling sector has been under pressure due to the concerns about the day rates and decreased capital expenditures from the oil and gas companies. Almost all of the companies operating in the sector have lost value since the start of the year. Transocean (NYSE:RIG) is down over 20% year-to-date, while Seadrill (NYSE:SDRL) and Ensco (NYSE:ESV) are down about 12% and 17%, respectively. We believe that the slowdown in the sector is temporary and these companies should make a strong recovery over the next 12-18 months, and patient investors should benefit handsomely from this buying opportunity. In our other articles, we have covered Seadrill in detail, and we believe Transocean is one of the most attractive picks in this sector, along with Seadrill.

Changes in the Strategy?

It is important to understand that offshore drilling is a capital-intensive business, and the rigs cost a lot. However, the day rates have been climbing over the last few years, which gave incentive to the offshore drillers to grow their fleets. Seadrill has benefited heavily from investing in the fleet, and at the moment, the company has one of the best sixth-generation ultra-deepwater fleets, and it fetches the highest day rates. Seadrill decided to take advantage of the record low interest rates, and borrowed heavily to fund its new builds.

On the other hand, Transocean's fleet is relatively older. Transocean primarily operates in two segments: contract drilling services and drilling management services. However, the company is looking to divest its drilling management services segment by the end of this year in order to trim its assets to achieve a higher-yielding asset base. The company is going to spin-off 8 out of 21 mid-water floaters. At the moment, ultra-deepwater rigs fetch the highest day rates, and the company has 27 of these rigs, and 12 deepwater rigs. Transocean currently has 78 rigs, and the spin-off will allow the company to decrease its costs and invest in high-margin ultra-deepwater rigs.

Fleet Overview

Being the biggest offshore drilling companies, Transocean owns a versatile fleet of assets in the industry. The company recently released a complete and updated list of its fleet, which will help us to determine the future growth potential of the company. The company owns a total of 27 high-specification floaters: ultra-deepwater [UDW] rigs, 12 high-specification floaters: deepwater rigs, 7 high-specification floaters: harsh environment rigs, 21 mid-water floaters and 11 high-specification jack-ups.

Moreover, there are 14 rigs under construction at the moment, out of which, the company has secured contracts for seven rigs. However, the bigger issue is the contract expiration on the current fleet - 14 out of 27 ultra-deepwater rigs will be out of contract during the current year. Furthermore, seven out of twelve deepwater floaters will be out of contract during the current year. With the slowdown in the offshore drilling sector and Transocean having an older fleet, we might see Transocean struggling to secure contracts for all of its out-of-contract rigs. However, despite the slowdown, the companies in the sector have been able to secure contracts, which should give encouragement to Transocean. Furthermore, the decision to invest in the new ultra-deepwater rigs should set the company up for long-term growth, as the demand for ultra-deepwater rigs remains strong. Deepwater Asgard and Deepwater Invinctus are two of the new builds that will be delivered this year. These rigs will start operations by the second quarter of this year, with a day rate of $600,000 and $595,000, respectively. The table below shows the average day rates for the company. It is clear that the high-specification ultra-deepwater rigs fetch higher day rates as compared to the mid-water and shallow water floaters. Furthermore, harsh environment rigs also go at considerably high rates.

Source: SEC Filings

Another fleet status report by the company states that Transocean Marianas' drill site has been awarded an offshore four-well South African contract at a day rate of $370,000, with an estimated backlog of $118 million. Moreover, the Transocean Arctic has also been awarded a two-well contract in the Norwegian sector of the North Sea at a day rate of $519,000, previously contracted on a day rate of $419,000, with an estimated backlog of $83 million. This showed an improvement in the company's drilling contracts, as well as the rising day rates in the coming years.


Transocean is one of the biggest names in the offshore drilling industry, and the company will make a solid recovery. The offshore drilling sector will get out of the slowdown in the next 12-18 months as the oil and gas companies again start to spend more on exploration and extraction activities. In the meantime, Transocean's fleet will be in a lot better position with the addition of new ultra-deepwater rigs and the spin-off of some of its older rigs. As a result of this spin-off, the proportion of high-margin rigs will increase, which will enhance the profitability and cash flows of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.