Transocean's Deepwater Expedition Contract Bodes Well For Drilling Company Day Rates

| About: Transocean Ltd. (RIG)

On March 15, 2012, Transocean (NYSE:RIG) announced that it has been awarded a two year contract beginning in December 2012 for the Deepwater Expedition. The drillship will be earning a day rate of $650,000 for the duration of this contract. As Transocean noted, this is the highest day rate awarded for any rig during the current industry upcycle.

This contract serves to reinforce my conviction that the world is facing a shortage of deepwater drilling rigs, and this will lead to climbing day rates for these rigs. (I have written before on this topic.)

This $650,000 day rate is substantially above the worldwide average for deepwater rigs and this gives further evidence that day rates are increasing worldwide. This chart from RigLogix shows the average dayrates for all floater rigs in the worldwide fleet as of March 17, 2012:

This chart is not showing the current market day rates, but the average day rate for all floater rigs currently under contract anywhere in the world. The Deepwater Expedition is a 1999-built drillship with a rated water depth of 8500 ft. As the table shows, the average day rate for this class of rig is $462,000. As stated, the Deepwater Expedition was awarded a dayrate of $650,000. As this is both well above the average day rate for similar rigs, as well as the highest day rate that has been awarded to any rig in the current upcycle, this shows that the market for these rigs is tightening. This tightening market is pushing up day rates industrywide.

The increasing market day rates have the potential to benefit all offshore deepwater companies that have a strong presence in this industry segment. This includes Transocean, Ensco (NYSE:ESV), Pacific Drilling (NYSE:PACD), and SeaDrill (NYSE:SDRL). As these companies are able to recontract out their rigs at higher day rates than what they are currently receiving then their revenues should increase. Costs for operating these deepwater rigs are not increasing as quickly as day rates, and so the increased revenue from the higher day rates should directly increase the bottom lines of these companies. If stock valuations remain constant, then the stock prices should increase with earnings.

Disclosure: I am long SDRL. I am considering acquiring positions in RIG and PACD.