Transocean's New Contract an Antidote to Oil's Volatility

Volatility in the energy prices got you feeling a bit loopy? Yeah me too, but looking through all the daily madness at the underlying industry fundamentals makes me feel much better. See through the smoke screen of the daily price swings and see the reality- where money is actually put to work to change the world, not just an investment vehicle or hedge. TransOcean (RIG) just signed another 5-yr contract for one of its deep sea rigs and the pricing power couldn’t be better. The 5-yr contract signed today is worth $1.9 billion while 2 comparable contracts signed just 3 months ago (April 7th) were at $928 per ship for 5-yr:

July 8, 2008: “Transocean Inc. (NYSE:RIG) today announced that its deepwater drillship Deepwater Pathfinder, a single-activity rig capable of drilling in water depths up to 10,000 feet, has been awarded a five-year contract by a subsidiary of Eni for drilling operations primarily in the U.S. Gulf of Mexico. The contract is scheduled to commence in March 2010 following completion of the rig’s existing contract commitments.

Estimated contract revenues that could be generated over the five-year contract period are approximately $1.19 billion. Estimated contract revenues represent the maximum amount of revenues that may be earned in the contract period, excluding revenues for cost escalations.

The Deepwater Pathfinder drillship, which entered service in 1998, is one of 39 High-Specification Floaters in the Transocean fleet, 18 of which are Ultra-Deepwater Floaters capable of drilling in water depths of 7,500 feet or greater. ”

April 7, 2008: “Transocean Inc. (NYSE:RIG) today announced that the ultra-deepwater drillship Dhirubhai Deepwater KG2 (formerly Deepwater Pacific 2), which is owned by a joint venture in which the company has 50 percent interest, has been awarded a five-year drilling contract from Reliance Industries. The contract is expected to commence in the first quarter 2010 following shipyard construction, sea trials, mobilization to India and customer acceptance.

Contract revenues which could be generated over the first six months and remaining 54 months of the contract period are estimated to be $90 million and $838 million, respectively.

In addition, Transocean announced that the first ultra-deepwater drillship owned by the joint venture, Dhirubhai Deepwater KG1 (formerly Deepwater Pacific 1), has now had its previously announced four-year contract extended by Reliance to five years. Contract revenues which could be generated over the first six months and remaining 54 months of this contract period are estimated to be $90 million and $838 million, respectively. The drilling contract is still expected to commence in the third quarter of 2009, following shipyard construction, sea trials, mobilization to India and customer acceptance.”

That’s a nice almost 30% increase in rates in exactly 3 months…telling me Petrobras really is sucking up all the rigs out there, National Oilwell Varco really can't build rigs fast enough, and whoever wants a rig needs to pay up to get them… You don’t just sign 5-yr multi billion dollar contracts based on oil swinging up and down a couple dollars a day. If you do, your oil company is wreckless, and obviously these oil companies aren’t wreckless, otherwise they would be out of business.

If you want to keep tabs on the rigs currently in service around the world, check out this resource by Baker Hughes (BHI) I have featured on SuckingLess.com

Disclosure: No positions in the stocks mentioned

Comments

[BrianPursley]

RIG and NOV are still my 2 best ideas.

oilismastery.blogspot..../

[paulk8756]

At appears the explorers themselves are still "speculating"... on the long side of oil. One thing is certain, they know more about all this than anyone else.

[Eric Frantz]

Great article. I still really like the stock. It has held strong with the downturn of the market, which is a good sign for when the market begins to go up again.

emervest.blogspot.com

[Jeffrey Lin]

Paulk8756, why would you think the explorers are "speculating"... on the long side of oil? The rest of the business world actually DON'T think like traders and hedge funds where everything is a diceroll at the craps table. Accumulating more resources, which includes drilling for oil as well as building infrastructure for people to use, is as much a speculation as it is to say the billions and billions of people who will be using these resources won't exist. Unless the human race become infertile, this is the greatest development boom this earth has ever seen...and you can sit there and just complain how it will all be over, and it will be, but by that time the world will be changed dramatically, and ridiculous wealth created along the way.

Everyday the news keeps wanting to tell people this global development story is over, and you should stay away and let other people make the money off of it, not you. I just remember this family story. My great grandfather, in the 20's, bought and sold (i.e. traded) rice in Taiwan...then some empty thirdworld island. He retired before he was 40 yrs old, owning literally MOUNTAINS our family still has today. That was just a tiny island, albeit it successful now as the leading chip manufacturer in the world. But still, I want to own MOUNTAINS...and the way to getting it is riding this wave...

[marvingortler]

Are there any estimates of the quantity of deepwater oil? Is it recoverable? What are the economics of recovery? What technical problems remain?
The Big Oil companies are awash in profits and must invest in deepwater exploration otherwise face excess tax on obscene profits.
Deepwater oil exploration is speculation and Jeffrey Lin shouldn't
squander grandfathers treasure until the above questions are answered/resolved.
Jef sounds a little like George W.