Update: Transocean's December Fleet Update Has A Few Surprises

| About: Transocean Ltd. (RIG)


DD1 is contracted after being idle since early 2014.

Deepwater Pathfinder's contract has been repudiated by ENI.

KG1 contract start is being pushed out another month.

Transocean's (NYSE:RIG) December fleet update summary has both positive and negative developments.

On the positive side, Development Driller I, a fifth generation semisub, has been contracted to Exxon for a period of 24 months at a decent dayrate of $382,000 by today's standard. This rate is comparable to Ensco 8503 contract with Stone Energy in the Gulf of Mexico. African operations are slightly more expensive, thus reflected in a $32,000 higher rate. Additionally, Inpex has exercised its option on Jack Bates, fourth generation semisub, which will keep the rig working through February of 2016. The dayrate on the option exercise is $370,000, which is below the original contractual rate of $420,000. Somewhat positive is the five-month extension on KG2 at a dayrate of $395,000. This is a state-of-the art drillship and rates below 400k is nothing to write home about. Nevertheless, given today's contractual environment it's better to have some work then sit idle. And finally Sedco Express, a fifth-generation semisub, has a short 45-day contract to remain operational, while searching for a longer-term work in West Africa.

A big negative surprise is the repudiation of the contract on Deepwater Pathfinder by ENI. The rig was contracted until April 1st, 2015 at an astronomical dayrate of $681,000. Transocean is contesting termination and intends to sue ENI for lost revenue, however, until the legal decision is rendered, the company will lose $100 million in backlog revenue over Q4 2014 and Q1 2015. The second slightly negative development is another delay in the start date for KG1, which is contracted to Petrobras on a three-year contract. The delay means additional thirty days of out-of-service time resulting in lower Q4 revenues coupled with higher Q4 expenses.

Two more UDW rigs (GSF Explorer, Deepwater Expedition) rolled off contracts along with a DW semisub (Discoverer Seven Seas). Total number of idle rigs is now 11 (9 UDWs, 1 DW, 1 MW). Additionally, the company will scrap remaining seven cold stacked rigs and take a non-cash charge (book value writedown) of $100-140 million in Q4. In total Transocean will scrap eleven rigs and will save $50-60 million in annualized cold stacking expenses. The company is in the process of identifying additional candidates for scrapping and I'm sure it will find a few rigs in its midwater/deepwater fleet that satisfy scrapping parameters. The company has already changed the total fleet number to 73 on its website down from 79 before the current status update.

Transocean announced lower 2015 out-of-service time and it's mainly due to Deepwater Expedition not going through a planned inspection unless it secures a satisfactory contract during next year.

Fourth quarter is currently tracking at $2.11 billion in revenue taking into account cancellation of Deepwater Pathfinder and a later start date for KG1. Contract drilling expenses are tracking at $1.26 billion, slightly higher due to KG1 additional out-of-service time and DD1 contract preparation expenses, resulting in a preliminary EPS estimate of $0.89, excluding non-cash charges. My EPS number is still substantially higher than current consensus and I continue to contend that street is wrong in its estimates of Transocean's earning power even considering the fact that 25% of the company's fleet is idle.

Disclosure: The author is long RIG.

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