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Transocean: Well Positioned For A Deepwater Recovery, But May Be A Very Long-Term Story

Mar. 07, 2020 5:54 AM ETTransocean Ltd. (RIG)55 Comments


  • Transocean has been working to high-grade its fleet over the past six years.
  • This could give the company an advantage when the offshore drilling industry finally recovers.
  • The number of ultra-deepwater contracts being offered has been increasing, so we are already seeing signs of a recovery.
  • There is some evidence that shale oil production growth is slowing down and will continue to do so with offshore taking its place.
  • This could be a very long-term play, and it is critical for the company to hold out until then.
  • Looking for more stock ideas like this one? Get them exclusively at Energy Profits in Dividends. Get started today »

On Wednesday, February 26, 2020, ultra-deepwater drilling giant Transocean Ltd. (NYSE:RIG) gave a presentation at the SpareBank 1 Energy Conference. As is usual for presentations like this, the company devoted a great deal of effort into making an investment case for itself to the analysts who were in attendance. Naturally, it did this by providing an overview of its business and discussing the advantages that it has over its competitors. The biggest problems that Transocean is facing today though are industry-wide as low dayrates and limited contracting activity have made it difficult to generate either revenue or cash flow. Transocean did discuss these dynamics somewhat in its presentation along with why it will improve going forward. I will discuss this as well over the course of the article, but may need to add information from other sources to provide a more complete analysis. While the macroeconomic pressures afflicting the company will likely ease over time, it looks likely that the company will continue to struggle over the medium term. As such, a company like Transocean is probably not a good investment for a risk-averse investor.

Transocean is one of the largest companies in the offshore drilling industry. The company's fleet consists of 44 ultra-deepwater drilling rigs and three harsh-environment jackups. This is a very different make-up and a much smaller fleet than it had six years ago. We can see this here:

Source: Transocean

This change was driven by numerous disposals of rigs over the intervening period. Since 2014, the company either scrapped or sold 15 ultra-deepwater, 38 deepwater and midwater, and 15 jackup rigs. This was in direct response to the conditions that we have been seeing in the industry. As I have discussed in numerous previous articles, the exploration & production companies that make up the customer base of the industry have shown a marked preference for

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This article was written by

Power Hedge profile picture

Power Hedge has been covering both traditional and renewable energy since 2010. He targets primarily international companies of all sizes that hold a competitive advantage and pay dividends with strong yields.

He is the leader of the investing group Energy Profits in Dividends where he focuses on generating income through energy stocks and CEFs while managing risk through options. He also provides micro and macro-analysis of both domestic and international energy companie. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (55)

it's going bankrupt soon. Stop with your research trying to say this or that. Bottom line: BANKRUPT
kingRIG2.0 profile picture
$851 million market cap
I’d imagine you could buy every single OSD for say 4 billion dollars takeover ?
Sure, and you'd likely lose $4 Billion.

Most, if not all, due to reorg - unsecured bonds are the current equity.
Informative article . . . BUT . . .

A couple of things I don't understand . . .

1- You say that you seek 7 % + Income Yields . . . So what are you doing spending time on RIG, which pays no Dividend, and will not for the foreseeable future ? . . . Income Yield players are Investors . . . RIG is Speculation on steroids.

2- You assert that a lot of of the shale crowd will run into financial trouble . . . Likely true . . . But you pretty overlook the fact that RIG is highly leveraged with a runway that is getting shorter every month . . . It would have been nice to see how you assess RIG's ability to stay out of Chapter 11, and over how long a period.

Like many who underestimated the disruptive power of shale in recent years, I bet on RIG a little over three years past . . . Average cost per share of about $ 9.50 . . . Dumped 2/3 around $ 5 . . . Certainly see a future for oil offshore . . . When ? . . . Don't know . . . Sooner than later if the Saudis have the " big ones " to hold pricing low until the shale crowd gives up . . . That is a huge assumption and could take a while . . . If the Saudis choke on their own medicine, Offshore is a long, long way from making a sustainable recovery . . . Still, when RIG's share price hits $ 0.50 - I said when, not if - it may prove too enticing to resist.

Look forward to your follow up about Chapter 11 Risk.

kingRIG2.0 profile picture
RIG market cap $910 million, gotta love the Wall Street manipulation
TheBot profile picture
What a day!
I was thinking of buying at $1.5. I fear my wish may come true.
I bought $3.3 just a week ago 🤦🏻‍♂️🤦🏻‍♂️🤦🏻‍♂️
Bought again at 1.79
Stock plummet to new low. $1.70 fire sales🖕🏻
Vince Holley profile picture
Based on the Saudi move, this stock is going to zero.
Henrik Alex profile picture
@Vince Holley

How did this bet play out for you?
Henrik Alex profile picture
What do you think of this statement made by you six months ago:

"I have to laugh at some of the responses on the Saudi production processing hit. Do these guys really think there is a way to just reroute 5.7 million bpd to a gallon jug that sits off to the side of the pumping field. I want some of what they are smoking. The most important point here to get is that risk premium on Saudi supply has just seriously skyrocketed."
hyenah1 profile picture

Thank you for some clarification. If English is not your native tongue, I apologize.

I agree that Transocean shareholders have taken a beating over the past decade or so, however, this is greatly due to shale production and the plummeting global demand for crude.

I purchased RIG shares along with another family member for the 12% dividend yield that was promised by the BS artist, and billionaire Carl Icahn. As you may recall, he put a few of his clowns on the board and then realized Transocean could never pay ANY dividend - dumped his shares leaving us holding the proverbial bag! He got out above $40 and here we are at $2.

Beware of "corporate raiders" like this aforementioned scumbag! He made his billions screwing others obviously.
Transocean has some great rigs in the deepwater and harsh environment segment. However way too much debt and liquidity of only little over $3B ($2B cash and revolver of i think $1.5B). And if they raise cash through revolver it will also add to their. $9B debt. Market is not going to see any big recovery in next couple of years and i am afraid this will force Transocean into financial restructuring which usually happens under chapter 11.
All offshore drilling companies will eventually be forced into bankruptcy in my humble opinion . Their debt levels are simply unsustainable and it looks like the Saudis are going to speed up the process by killing WTI Oil prices.
Island_Dweller profile picture
Offshore is dead money if you buy and hold. Trade the names, but for the mean time watch out below.
Aventador profile picture
Going to be a interesting week for oil Hoping the price war is finally on. We should see the lowest oil prices tomorrow in years. Everyone benefits in the end but will be very painful for the offshore crowd.
MrEnscoLaTx profile picture
Looks like a nice, thorough article. One thing for sure, it’s been a crazy ride so far and sure to get crazier. Don’t forget fundamentals, don’t panic and be patient.
Nice article, thank you.
Bulldog67 profile picture
@Power Hedge

This is a thorough review of RIG, and I think you did a very fair summary of the pros and cons. The real question is can Transocean’s liquidity last until the industry turns? Given their substantial CapEx requirements for two very expensive drill ships, the company is going to have to pledge rigs against against any new debt. Collateralized debt is the only way RIG can remain afloat financially till day rates improve. Their equity is already below 50% of total capital, and that # declines each quarter with ongoing losses that reduce retained shareholder earnings. The company is in a position where it no longer can scrap cold stacked rigs that will never work again, due to the resulting impairment charges. Those impairments would take equity down even further. While they are non-cash charges, they lower the equity/capital ratio and can lead to bond covenant violations.

Also there is one factual error in your report. You misread RIG’s “fleet transformation” slide to read 3 HE jackup rigs, while those are actually mid and Deepwater floaters. RIG sold their entire JU fleet to Borr Drilling about 3 years ago, which in hindsight was an incorrect decision as the shallow water area has been the first to recover.

Other than that one error, this was a well balanced and complete article! Thanks for publishing!
@ Bulldog67
The key covenant for the revolver is total indebtedness/tangible capital < 60%. At the end of 4Q, this metric was 46% so still decent headroom for further losses/writedowns. The company is now disclosing this metric with its earnings reports so there can be no dispute over the level.

Bulldog67 profile picture

thanks for the reference. RIG still has some intangible assets on it’s books from the Songa merger (higher day rates than market rates at time of acquisition). However, let RIG scrap some of their older floaters and the overall level of assets will drop quickly.

I have not run the #’s, but I assume the company will monitor it closely as to what they will retire and what rigs they keep in cold stacked mode.

Thanks again for the reference!
would make a good deepwater fishing platform add some Asian chicks make one hell of a party ..
Very sad to see off-shore getting beheaded like this. There will be nasty ramifications for oil supply if off-shore completely gets shuttered. NE is done. SDRL is dead. DO or RIG; who will be the last one standing? Will off-shore ever come back? Really astonishing
The thesis is sound but the recovery will be too slow.

Look at oil prices and Exxon Mobil stock. These big oil companies are getting crushed and there are demands by shareholders to reduce their CAPEX budgets even further. Transocean is still having to spend hundreds of millions of dollars building new rigs that the market doesn't need.

Transocean as a company has a strong future but I think RIG shareholders get wiped out because of the inability to service their debt.
@dopexule - not sure what you are talking about. Hey currently have two rigs under construction. One which has a 5yr term contact and is the worlds first 20k UDW rig. The second which is being bid on additional 20k oops for which no available rig exists
Perfect storm with shrinking demand and fears of increasing supply. Short term outlook is terrible for osd, but long term investment thesis is still valid. Corona should be out of picture in 6 months and offshore production is starting to decrease after this year and therefore new investments are needed to even maintain production levels. Remember, osd investment outlook is years, not weeks or months.

Last time I saw panic selling like this was four years ago with mining stocks. Bought Vale at 4 $ and the stock went to 2 $ and I sold that position later around 12 $. I might double down my RIG and DO positions, but timing is tricky with crazy volatility like this.
Yes I was distraught owning $XME at that time I was lucky to get out with a small profit but then watched it climb 200% higher.. Same with $TSO a while back because I bought the hype that batteries were going to kill gasoline sold for a small profit only to watch it go up 400%.. These are not 100% comparable to the OSD industry but may have some similar pockets of opportunities.. The dreadful sentiment with mining companies back then were just as brutal as OSD today.. OSD BS's were possibly not as good as the mining companies so you'll have to buy the best of breed if there is any left in this sector.. I have $HAL, $SLB, $HP, $BKR, $CLB and just started a tiny spec play with $DO and even hold a smaller position in $RIG.. Oil is still the #1 most used commodity on the planet even the green crowd is its biggest customer.. E.g. Bernie and the Jets..
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