Shiv Kapoor

Is It Safe?

I agree with energy and oilfield services and drillers have sound long term fundamentals. But we are nowhere near the point at which an investment makes sense. There is huge demand for drilling rigs capable of deep and ultra deepwater work. The supply of such vessels was just not there and so several 3rd, 4th and 5th gen rigs have enjoyed super normal day rates. During the past cycle, there have been large investments in building of jack-ups, semi-submersibles and drill ships. Several of these are spec builds, while many are built with underlying contracts. I have no doubt that the fantastic backlogs will pay for these assets and leave behind a high quality fleet largely paid for with modest debt remaining on the books. But all of this is priced. What is not priced is a return to long term margins once day rates fall because utilization will fall with the coming of a huge fleet onto the markets. While healthy demand is a given, fleet supply will be in place to match demand. During y/e 12/31/04 net profit as a % of revenue was under 1%. By end 2007 it has risen to 51%. The long term profitability of the sector once fleet supply and demand are in balance is roughly 15%; add to that significant moderation in day rates - rates will fall very significantly once supply and demand are in balance. Expectations of long term growth need to come down to earth. Transocean is an absolutely brilliant company; top management, top engineering talent, top asset quality; the company has every reason to be proud. It is a good buy once the valuations make sense. Just now we are nowhere near that point; I would not be surprised to see a 50% cut from where we are today on bearish extremes.