As the deepwater drilling market rebounds strongly, it remains interesting that the once unquestioned leader continues to struggle. After all, the company even uses deepwater.com for their official website.
Everybody knows that Transocean (RIG) has been hit hard since the Macondo accident back in April 2010. While that incident initially set the company back, the stock rebounded sharply at the end of 2010 and the start of 2011. Investors buying the stock though weren't paying attention to their aging fleet.
The company engages in offshore contract drilling services for oil and gas wells worldwide with a primary focus on deepwater and harsh environment drilling.
Now, the company faces regulatory issues in Brazil and the selloff of jackup assets, two moves that could transform the company; questions remain whether these issues will move the stock even as the industry soars.
Brazil Regulatory Issues
Anybody knows that when you see one cockroach that a whole family exists unseen. That applies to the mistake investors made chasing the stock higher in 2010. The Macondo issue was just the start of problems with outdated equipment and even possibly a lax corporate culture. The once leader of the deepwater market was now running into issues that numerous startups weren't facing with new rigs.
Back in early September, a ruling was upheld that bans Transocean and Chevron (CVX) from operating in Brazil. This worst-case scenario could have a huge impact on Transocean.
Fortunately for the company, this ban would dramatically impact the production output of Petrobras (PBR), leaving the Brazil government with little recourse other than work out a deal. Absent that, the major oil company of Brazil would be impacted the most.
According to a Reuters report, Transocean has 10 deepwater rigs working in Brazil - about 13% of Brazil's total. Of those, only seven are working for Petrobras, though that amounts to 23% of their rigs. Clearly, Petrobras would be dramatically impacted by this continued ban, especially as the market for deepwater rigs is already tight with contracts filling up for 2014 newbuilds. Where else would Petrobras be able to replace those rigs?
Shallow Water Drilling Rig Sell
Back on September 10th, the company agreed to sell 38 shallow water drilling rigs to Shelf Drilling for $1.05B. While the deal had been anticipated, the value was expected to be much higher.
After reducing the $200M in net current assets transferred, the transaction will only be valued at $805M. Considering the carrying value for the long-lived assets is $1.4B, the value of the deal has to be questioned.
After this deal, the company will be focused on high-specification floaters and jackups. Definitely a good move to get these assets off the books, but most investors didn't want it done at all costs.
The best indication of the deal value is that the company expects it to be dilutive in 2013 suggesting that Transocean gave up to much value for the price.
August Fleet Update
On the 18th, Transocean provided the monthly fleet update that re-confirmed the industry trend of higher dayrates for just about every rig. While the company reported a new three-year contract for the ultra-deepwater newbuild drillship, Deepwater Invictus, the big news remains the substantial increases in dayrates for rigs coming off contract.
Highlights are as follows:
- GSF Development Driller I -- Awarded an estimated 20-month contract extension at a dayrate of $580,000 ($348 million contract backlog). The rig's prior dayrate was $522,000.
- GSF Rig 135 -- Awarded a two-year contract for work offshore Congo at a dayrate of $365,000 ($266 million contract backlog). The rig's prior dayrate was $340,000.
- Transocean Prospect -- Awarded a four-well contract for work in the U.K. sector of the North Sea at a dayrate of $405,000 for the first two wells and $375,000 for the remaining two wells ($146 million contract backlog). The rig's prior contract dayrate was $252,000.
- GSF Parameswara -- Awarded a two-year contract extension for work offshore Indonesia at a dayrate of $136,000 ($99 million contract backlog). The rig's prior contract dayrate was $122,000.
- Two deepwater floaters, the Jim Cunningham and Discoverer 534, were sold. Both rigs were stacked and previously held for sale. The details of the transactions have not been disclosed.
- On September 10, 2012, the company committed to discontinue operations in the standard jackup and swamp barge markets. All standard jackups and the swamp barge are currently held for sale.
The most impressive deal has to be the Transocean Prospect going from a $252K dayrate all the way up to $405K on work for two wells.
Considering the contract values are increasing and the order book is already tying up the newbuilds for 2014, the real competition for Transocean is for the investor's dollar. Since the accident, the stock has been the clear loser in the group.
Younger and more aggressive companies have had a very good run in that time period. SeaDrill (SDRL) remains the most aggressive company of any size while Atwood Oceanics (ATW) has undertaken an aggressive newbuild plan. New companies such as Pacific Drilling (PACD) continue to focus exclusively on the deepwater sector attracting investors. While Ensco (ESV) has had a huge run the last two years easily outpacing the losses of Transocean and challenging the company for sector leadership.
The stock has stabilized around $40 several times, but for now the downtrend remains in tact. Transocean needs a sustained move above the 200ema to signal the start of a bull market.
3 Year Chart - Transocean
Most disappointing with this company is that as earnings normalize in 2013, the stock is actually more expensive than the competitors listed above. The 2014 estimates of $6.19, though, might finally provide some upside.
The company still faces the legal issues in Brazil and the transition away from the shallow rigs. As the numbers for 2013 and beyond accurately reflect the updated business structure and the Brazil issue gets resolved, investors might finally be able to invest in this stock. Until then, keep waiting for this company to get its act together before any rebound occurs.
Disclosure: I am long ATW.
Additional disclosure: Please consult your financial advisor before making any investment decisions.