Is Transocean's Entire Jack-Up Rig Fleet Divestiture Really A Competitive Advantage?

Summary

• Borr Drilling has received a letter of commitment from Total for a firm one year contract, with an option to extend.
• I view Transocean's divestment of the entire jack-up fleet as an evident competitive advantage.
• Transocean is the uncontested leader in the deep water sector (floaters segment) with an impressive backlog estimated at over $10 billion.

Image: Jackup Borr Frigg (Formerly the Hercule Resilience). The Jack-up is a Kfels Super A class, high-spec jack-up which entered into service in 2013. The rig can operate in water depths of up to 400 feet, with a maximum drilling depth of 35000 feet.

Investment Thesis:

The offshore drilling Industry is suffering through the worst bear cycle in history. The oil crash that began late in 2014 has had a terrible effect, particularly for the offshore drilling players such as Transocean (NYSE:RIG), Seadrill (SDRL), Rowan Companies (RDC), Ensco PLC., (ESV) or Noble Corporation (NE) and another dozen or more companies struggling to avoid a financial meltdown due to a basic lack of drilling contracts, dismal day rates at below breakeven levels in some cases, and concerning rig oversupply.

However, Transocean is the uncontested leader in the deep water sector (floaters segment) with an impressive backlog estimated at over $10 billion (see graph below as of July 11, 2017), and I am confident that the company will survive this unprecedented downturn.

Today's news:

According to OffshoreEnergyToday:

Borr Drilling, a recently established offshore drilling company, has received a letter of commitment from Total for the use of one of its jack-up rigs in Nigeria.

According to the driller, which recently bought Transocean’s entire jack-up rig fleet, the company has, together with its Nigerian partner Valiant Energy Services West Africa, received the commitment letter from Total in Nigeria, for employment of the Frigg jack-up drilling rig.

The commitment is for a firm one year contract, with an option to extend. The contract is expected to start in the third quarter of 2017.

Borr Drilling is a new offshore drilling company, which bought Transocean's entire jack-up fleet for $1.35 billion, including $320 million of cash. Please click here to read my article on March 21, 2017.

Borr Drilling Ltd. Is registered on the NOTC-list as of 19 December 2016 with ticker code BORR.

On January 24, 2017, the company completed the delivery of the two Hercules JUs, the Triumph and the Resilience.

Borr Drilling owns actually only two jack-ups that it purchased from Hercules offshore for an amount of $130 million.

1. The Borr drilling Ran (formerly the Hercules Triumph - 2013).
2. The Borr drilling Frigg (formerly the Hercules Resilience - 2013).

Borr Drilling owns also the Transocean's jack-up rig fleet.

Worth noting, the Frigg was not a part of the Transocean deal. The rig was acquired earlier when Borr bought two jack-ups from Hercules Offshore, a bankrupt U.S. offshore driller.

Commentary:

Transocean decision to divest its entire jack-up rig fleet was not easy to justify at the time. The offshore industry is confronting a very difficult downturn as we speak, and a recovery seems elusive, at best.
However, the jack-up segment is considered to be the first segment to recover and, in fact, we have experienced a significant increase in contracts the past three to four months. And so, why did Transocean let go of its entire jack-up fleet?

The response is that Transocean jack-up rig fleet was not the main core of the company's business model, and represented only a tiny fraction of the contract backlog, while increasing significantly future liabilities and Capex, with five jack-ups under-construction. Furthermore, the contract backlog is secure by long term contracts with Shell as the graph below is showing:

This divestment allows the company to take care of the long term debt by reducing it to a more acceptable level. I view it as an evident competitive advantage.

On June 13, 2017, Transocean announced cash tender offers for $1.5 billion aggregate principal amount of notes due 2017, 2018, 2020 and 2021.

The company announced early results of the tender cash-offer on June 26, 2017.

Transocean has about ~$3.8 billion in cash and cash equivalent now (including the May offering and the cash paid by Borr Drilling).

In short, earnings per share, cash flows, and EBITDA are all heading south for a long while, which is another reason to hurry to cut debt, while the company can do it safely. It is a friendly move for shareholders because the risk of restructuring is now quite low.

At the end of the first quarter 2017, the total debt was about $7.5 billion after Transocean last two offerings totaling $1.88 billion, on July 8, 2016 and December 8, 2016.

This deal has the potential to cut the total debt to $6 billion, while leaving over $2.2+ billion in cash and cash equivalent.

Conclusion:

These new developments make me confident about my long holding position in this company even if the recent volatility in oil prices is quite disconcerting. I can handle the pressure and I have added recently to my long position again.

Important note: Do not forget to follow me on the offshore drilling sector. Thank you for your support.

Analyst’s Disclosure: I am/we are long RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I also trade regularly the stock.