Transocean Sets New Target For Newbuild Delivery Postponement

| About: Transocean Ltd. (RIG)

Summary

Transocean postpones the delivery of 2 drillships.

The company's move may start a new trend.

Others might follow.

The offshore drilling industry has already gone through one round of newbuild postponements. On average, drillers have been able to postpone their problems with newbuilds until 2018. However, recent developments including oil price dynamics (oil is too low for offshore drilling even after substantial upside) and rare contracts made it clear that a mass delivery of newbuilds in 2018 will be a catastrophe for the industry. Part of the problem is that players cannot pay for the new rigs without damaging their balance sheet, but the bigger challenge is the absence of work and a major fleet of idle rigs who wait for the job.

Transocean (NYSE: RIG), who previously was the first mover into the rig-stacking trend, is leading the industry once again. The company has just announced that it agreed to delay the delivery and related final payments of two drillships to the first and third quarters of 2020. Previously, these drillships were set to be delivered in the second quarter of 2019 and the first quarter of 2020.

At first glance, the decision does not make any big difference, as 2019 is still far away and who knows what will happen to oil prices in the coming years. However, Transocean's move is both prudent and remarkable. The company clearly envisions the problems with oversupply of rigs - especially on the ultra-deepwater front. That's why it is rational to use the ability to postpone the delivery now when it does not require major financial sacrifices.

The move is remarkable for the industry as it shows how the mindset changes from the last year's "we expect improvements by 2018" to "we expect improvements by 2020". In this light, I will re-iterate my call that drillers with predominantly UDW fleet like Pacific Drilling (NYSE: PACD), Ocean Rig (NYSE: ORIG) and Atwood Oceanics (NYSE: ATW) will have trouble finding the work for their rigs.

It's interesting whether Transocean will try to postpone deliveries of five high-spec jack-ups. The first one is set to be delivered in the first quarter of 2018, and others will follow at six-months intervals thereafter. Current oil prices are theoretically more favorable for jack-ups than for UDW drillships, but practice shows that lack of work and fierce competition may be easily sustained through 2018.

Anyway, Transocean's move will likely be the first one in a row of similar moves by other industry participants. Of course, it's easier to postpone the delivery of a drillship that should have been delivered a few years from now than the one that should have been delivered in the coming quarters. However, there's little drillers can do about the contracting environment, and postponing deliveries further into the future looks like the only viable option. At the same time, yards will likely be cooperative with drillers for the second time as there's no money to be taken from dead drillers.

Just like with stacking, Transocean might set a new trend for the industry with the target to delay everything that's possible until 2020. I believe that we should closely watch whether Seadrill (NYSE: SDRL), who has quite a number of newbuild deliveries scheduled for coming years, will try to push them further into the future when it announces its restructuring plan. I also envision the development of another trend, namely equity issuing, as showcased by Ensco's (NYSE: ESV) recent 25% dilution.

All in all, the news is good for Transocean. Any additional postponement of newbuild deliveries (except for contracted ones) will also be beneficial for the company. The industry as a whole remains challenged and I hope to hear additional details on the topic from management teams soon when drillers report their quarterly results.

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