Transocean's Backlog Makes The Company An Uncontested Leader

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About: Transocean Ltd. (RIG)
by: Fun Trading
Summary

Total backlog is $12.2 billion as of February 11, 2019. Transocean added about $907 million in contract backlog since October 2018.

I still advise accumulating the stock for the long term. However, one caveat is that the drilling industry is exceptionally volatile and particularly weak since October 2018.

It is paramount to take advantage of this strong volatility by trading a significant portion of your RIG position based on the future oil prices outlook.

Image result for Semisubmersible Leiv Eiriksson Image: Transocean's semisubmersible HE Leiv Eiriksson Source: MarineTraffic.

This article is an update of my previous article published on October 22, 2018.

Investment Thesis

Transocean (RIG) continues to be my preferred offshore drillers with a considerable backlog of $12.2 billion as of 02/11/2019. It is crucial to indicate also that this firm contract backlog amount doesn't include options that could add over $8 billion after the acquisition of Songa Offshore.

RIG has been my most notable long-term investment in the offshore drilling sector which is concentrating in the ultra-deepwater and deepwater segment (floaters).

My recommendation is the same indicated in my preceding article, and I still advise accumulating the stock for the long term. However, one caveat is that the drilling industry is exceptionally volatile and particularly weak since October 2018.

This situation is due to a slow-paced recovery which is not nearly enough to support the industry growth. Consequently, it is paramount to take advantage of this strong volatility by trading a large part of your RIG position based on the future oil prices outlook.

One notable event that has impacted the February fleet status is that Transocean closed on December 5, 2018, the acquisition of Ocean Rig.

[T]he acquisition included two high-specification ultra-deepwater drillships, the Ocean Rig Santorini and Ocean Rig Crete, currently under construction at the Geoje Samsung shipyard in South Korea. They are estimated to be delivered in 3Q 2019 and 3Q 2020, respectively.

As I have said in my precedent article, when it comes to offshore drilling, the issue is both simple and incredibly complex.

We can base the offshore drilling industry business model on a straightforward equation. Oil operators must sell their oil and gas output, at an oil price sufficiently high to free enough cash flow for a decent level of exploration CapEx to replace reserves produced.

However, this process is complicated because this CapEx is now shared with the US shale exploration, which demands a growing sustaining CapEx due to a very high well depletion reaching about 70% the first year of production.

The market was expecting a full recovery in this sector in 2018 or at least until October when oil prices crashed again. Since then, optimism has gone in smoke, and we are back running on the oil survival mode.

Complete Fleet Status as of February 11, 2019

Transocean fleet status released on February 11, 2019. Click here.

1. Rigs Under Construction

#Ultra-deepwater Drillships RIG K feet Delivery Contract End

Day Rate

K $

Location
1 JSPL Ultra-deep Espadon TBN 1 ("1") 12/40 2Q'20 Available
2

JSPL Ultra-deep Espadon TBN 2

("1")

12/40 4Q'20+ 4Q21-4Q28 455

[Chevron]

US GoM

3

JV West Rigel, 33% interest, purchased 5/9/2018

"Transocean Norge"

10/40 11/19 - 5/20 293

[Equinor]

Norway

4

Ocean Rig Crete

12/40 Q3/20 Available
5

Ocean Rig Santorini

12/40 Q3/19 Available

("1"): The company agreed with SembCorp Marine's subsidiary, Jurong Shipyard, to enhance the two newbuild drillships by increasing the hook load capacity to three million pounds. With the upgrade, the company has further delayed the delivery dates on each rig. The drillships are expected to be delivered in the second and fourth quarter of 2020.

Source: Transocean

2. High-Specification Floaters: Ultra-Deepwater

High-specification Floaters

Ultra-deepwater Rigs

7,500'/12,000'-30,000'/40,000'

Ship or Semi

Contract

Start/End

Current

Day Rate

K $

Operator

Location

Day-off

1

Deepwater Poseidon

2018

Ship

2/28

477

[Shell]

US GoM

2

Deepwater Pontus

2017

Ship

10/27

477

[Shell]

US GoM

3

Deepwater Conqueror

2016

Ship 12/21 582

[Chevron]

US GOM

4

Deepwater Proteus

2016

Ship

5/26

473

[Shell]

US GoM

5

Deepwater Thalassa

2015

Ship

2/26

474

[Shell]

US GoM

6

Deepwater Asgard

2014

Ship

3/19-5/19

N/D

[Murphy Oil]

Mexico

7

Deepwater Invictus

2014

Ship

10/20

10/19-5/20

N/D

N/D

[BHP Billiton]

US GOM

3x1Y opt.

8

Discoverer Inspiration

2010

Ship

3/20

564

[Chevron]

US GOM

9

Discoverer India

2010

Ship

5/19

N/D

[CNR]

Ivory Coast

10

Dhirubhai DW KG1

2009

Ship See note ("1") N/D

[Reliance]

India

11

Dhirubhai DW KG2

2010

Ship

3/19

8/19-5/20

N/D

N/D

[CNOOC/Chevron]

China

Australia

12

Petrobras 10000

2009

Ship

9/21

~300

[Petrobras]

Brazil

13

Deepwater Nautilus

2000

SemiSub

3/19

N/D

[Shell]

Brunei

11x1m opt.

14

GSF Development Driller I

2005

Ship

4/19-4/21 (955 days)

N/D

[Chevron]

Australia

4x2m opt.

15

GSF Development Driller III

2009

Ship

2/19-7/19

192

[ExxonMobil]

Equatorial Guinea

3 x 6m options

Note 1:

The customer has exercised the option which is based on either the number of wells or duration. If the customer elects to exercise a well-based option, the option period will be up to five wells. If the customer elects to exercise a duration-based option, the option period will be comprised of two durations of 12-months and six-months, respectively. The customer has until March 31, 2019, to declare the terms of the exercised option. [Source: Transocean]

3. High-Specification Floaters: Deepwater

No operational rig after October

High-specification floaters: Deepwater (12)

4,500-7,200'/25,000'

Ship or Semi

Contract

Start/End

Current

Day Rate

K $

Location
None

4. High-Specification Semi-Submersibles: Harsh Environment

High-specification floaters: Harsh environment (7)

1,500'-10,000'/25,000'-30,000'

Contract

End

Current

Day Rate

K $

Location
1

Transocean Leader

1987-1997 - SemiSub

4 G

3/19-7/19

N/D

[Hurricane Energy]

UKNS

1-month option

2

Paul B. Loyd, JR

1990 - SemiSub

3/19-8/19

N/D

[BP]

UKNS

5x1m opt.

3

Transocean Arctic

1986 - SemiSub

5/19-7/19

7/19 - 5/20

N/D

N/D

[Capricorn Norge]

[DEA Norge]

Norway

3m opt.

4

Henry Goodrich

1985-2007 - SemiSub

11/19

275

[Husky Oil]

Canada

5

Transocean Spitsbergen

2010 - SemiSub

3/19-8/19

9/19 - 6/22

~230

~250

[Equinor]

NNS

6x1m opt.

6

Transocean Barents

2009 - SemiSub

7/19

262

[Suncor Energy]

Canada

6

Songa Enabler

2016 - Semisub

3/24

457-425

[Statoil]

Norway NS

7

Songa Encourage

2016 - Semisub

11/23

448-421

[Statoil]

Norway NS

8

Songa Endurance

2015 - Semisub

6/23

493-463

[Statoil]

Norway NS

9

Songa Equinox

2015 - Semisub

12/22

487-458

[Statoil]

Norway NS

10

Leiv Eiriksson

2001 - Semisub

4/19

10/19-1/20

N/D

N/D

[Lundin]

[ConocoPhillips]

Norway

5. Midwater Floaters

Midwater floater: (21)

1,000'-3,600'/25,000'

Ship or Semi

Contract

Start/End

Current

Day Rate

K $

Location
1

Transocean 712

1983

Semi

2/19

3/19-12/20

(580 days)

N/D

134.5

[Fairfield]

[ConocoPhillips]

UKNS

2

Actinia

1982

Semi 5/19 101

[ONGC]

India

6 - Stacked and Idle Rigs

Cold stacked rigs Name Year Built

Contract End

Location
1 Discoverer Spirit 2000 3/15 Trinidad and Tobago
2 Discoverer Enterprise 1999 9/15 US GOM
3 Sedco 714 1997 11/15 North Sea
4 Polar Pioneer 1985 12/15 Canada
5 Sedco 711 1982 1/16 North Sea
6 GSF Development Driller II 2005 1/16 North Sea
7 Discoverer Champion 2011 2/16 GoM
8 Discoverer Deep Seas 2001 2/16 GoM
9 Discoverer Americas 2009 4/16 North Sea
10 Songa Dee 1984 9/16 Norway
11 Discoverer Luanda 2010 2/18
12 Eirik Raude 2002 6/16
Idle Rigs
1

Discoverer Clear Leader

2009 11/17
2

Jack Bates

1997 10/18
3 Transocean 706 1976/1994/2008 10/18

Fleet Analysis Snapshot

Rig fleet per category (minus recently scrapped rigs or held for sale) - No Jack-ups:

Total UDW

Deepwater

semi-subs

HE Deepwater Semi-subs. Midwaters
Number of Rig operating 27 15 2 10 0
Cold stacked/idle 16 9 1 1 5
New build rigs - no contract 3 3 0 0 0
New build rigs with a firm contract 2 1 0 1 (33%) 0
Total 48 28 3 12 5

Fleet status/revenues in graphs:

The backlog distribution per quarter is impressive and stretches until 2028 due to long-term firm contracts signed with Shell (RDS.A) (RDS.B) and Ex-Statoil now Equinor (EQNR) through the acquisition of Songa Offshore.

I have estimated the backlog at $2,626 million for the remaining of 2019 (please see graphs below).

Total backlog is $12.2 billion as of February 11, 2019. The graph below is showing the yearly distribution.

I have estimated that the Royal Dutch Shell activity represents 44.3% of the total backlog of the company ($5.47 billion).

These contracts are firm, and if terminated for convenience, Transocean will be compensated by an amount above 80% of the total backlog remaining, making them ultra-safe.

The graph below is showing the yearly impact of Shell's backlog on the total RIG backlog.

Note: Shell's backlog was revised lower starting in July 2018, after the company applied a "day rate reductions on four of the company's newbuild drillships related to cost de-escalations attributable to down-manning."

The four drillships involved were the drillships Deepwater Poseidon, Deepwater Pontus, Deepwater Proteus, Deepwater Thalassa.

Transocean is essentially an ultra-deepwater business with over 69.9% of the total backlog attached to the Ultra-Deepwater portion. However, with the acquisition of Songa Offshore, the semisub segment Harsh-Environment (mainly the North Sea) represents 29.2% of the total backlog as of February 11, 2019.

What changed since the previous October fleet status

1 - The drillship Dhirubhai Deepwater KG2 has awarded a four-well contract with Chevron offshore Australia (term swap with the GSF Development Driller I.) The rig contract also indicates one four-well option. The deal is scheduled to begin in August 2019 and last until May 2020. Day rate estimated is around $220k/d.

2 - The semi-submersible rig Leiv Eiriksson, has obtained a one-well option in the Norwegian North Sea. The semi-submersible is currently working for Lundin until April 2019. Lundin also has several fixed-price options, which could extend operation until October 2019. Beginning in October 2019, the semi-submersible will work for ConocoPhillips. The gig is set to end in January 2020. ConocoPhillips also has options for the Leiv Eiriksson rig, potentially until May 2020.

3 - The semi-sub Transocean Arctic got a 2-well contract extension in Norway with Capricorn Norge and DEA Norge. In May 2019, the rig is scheduled to operate for Capricorn in Norway until July 2019, and then the semisub will work for DEA Norge under a contract ending in July 2020.

4 - The Drillship Discoverer India got two one-well options exercised in Ivory Coast with CNR. The gig will end in May 2019.

5 - The semi-sub Transocean 712 got a one-well contract in UK North Sea with Fairfield Energy. The rig’s contract will end in February 2019. After that, in March, the semi-sub begins another gig, with ConocoPhillips, ending now in December 2020.

6 - Transocean said it intends to scrap the drillship 2011-built Ocean Rig Paros. The drillship (from Orig which paid $65 million in an auction) is classified now as held for sale.

7 - Transocean signed a rig design and construction contract with Chevron for one of its newbuild drillships at the Jurong shipyard in Singapore. Chevron also signed a five-year deal in the Gulf of Mexico at a daily rate of approximately $455K/d. The estimated backlog is $830 million excluding mobilization and reimbursable. The contract is scheduled to begin in H2 2021 until 4Q 2026.

Conclusion and Technical Analysis

Transocean is expected to announce its earnings report on February 18, 2019. As always, this major event will decide on the stock general direction for the next few months.

The fleet status is a piece of good news with a sizeable addition in contract backlog of $907 million. However, the fourth quarter of 2018 and probably the next two quarters of 2019 will show a struggle in my opinion.

Often, in Transocean's case, the earnings results beat expectation easily, and consequently, the stock gets a boost. However, I am a little perplexed this time, and we may eventually get a not-so-great-news after reading what Diamond Offshores recently released which triggered a sell-off.

The report will be an essential indication after the acquisition of Ocean Rig in December. We will know about the actual debt and total cash which have changed significantly since the previous quarter.

In conclusion, I am still optimistic that the company will show a good balance sheet, but we are at a point where it is essential to take a step aside and look seriously at the company financials in the light of an uncertain recovery in the floaters' segment.

Thus, it is perhaps a good time to wait patiently and watch the show.

Technical Analysis

RIG is now forming a descending channel pattern which is not indicated by Finwiz. The line support is created by the low observed in September 2018, and the low in December 2018; then you can draw a line parallel starting from the high in mid-October 2018.

The descending channel patterns are short-term bearish which means the stock may re-test its low established in December 2018 at $6.25 (I recommend buying at this level) under certain conditions.

As I said in my conclusion above, RIG stock direction depends on the earnings results scheduled next week, and I am not bullish. Meanwhile, for this week only, I recommend selling part of your position on any crossing of the $9 level and get some cash to buy back on weakness if necessary next week eventually.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

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.