Transocean – Evidence Suggests That Offshore Recovery Has Now Begun, But Stock Lags Behind – Seeking Alpha

Transocean (RIG). Deepwater Nautilus: Ultra-deepwater, 5th generation semi-submersible offshore drilling rig (She was completed in 2000 and significantly upgraded in 2007). The rig was designed by Reading and Bates Falcon and constructed by Hyundai in South Korea.

Note: The Deepwater Nautilus can accommodate 166 people, can work in water depths of up to 8,000 feet and drill up to 30,000 feet. The rig's AIS shows it as currently moored in Brunei Bay, on the northwestern coast of Borneo island.

Transocean (RIG) is the uncontested leader in the deep water sector (floaters) with an impressive backlog estimated at $10 billion (see graph below as of August 13, 2017, - Backlog estimated by Fun Trading).

The company's fleet is now reduced to 50 rigs with ~26 rigs operating (including the two under-construction drillships contracted to Shell (NYSE:RDS.A) (NYSE:RDS.B) for 10 years).

The company management has done an excellent job to rejuvenate its rig fleet and cut its long-term debt to about $6+ billion at the end of 2017. This consolidation phase will allow Transocean to use the weakness of this market to eventually acquire distressed assets and keep its solid leading position in the floater category.

Despite a difficult environment, the growing sentiment in the offshore drilling sector is that the market has stopped degrading, prompting oil producers to look ahead for new opportunities in order to increase their fast declining oil & gas reserves, at a very attractive cost per barrel never achieved before.

There is always a silver lining in every dark cloud... And it is the jackup segment rebounding recently. The contracting activity in the jackup segment has shown clearly a nascent recovery shaping up during the first half of 2017. As an example, Vantage Drilling Inc., a private company from Vantage Drilling (OTCPK:VTGDF), has been awarded a contract for its Topaz driller Jack-up in Indonesia, according to OffshoreEnergyToday and the list is now long.

It is slowly expanding to the floater class and I was glad to report several welcomed contracts, such as the Seadrill Drillship West Saturn in Brazil or the Ensco three drillship contracts in West Africa. On August 10, 2017, according to OffshoreEnergyToday again:

Offshore driller Odfjell Drilling has signed a contract with Aker BP for the 2010-built Deepsea Stavanger semi-submersible drilling rig.

The driller informed on Thursday that the contract with Aker BP is for a period of approximately nine months, starting in February 2018 and completing around October 2018.

The contract for the 6th generation semi-submersible is for exploration and development drilling at various locations in the Norwegian Sea and the Barents Sea. The contract value is estimated up to $68 million, Odfejll Drilling said.

Yet, the offshore drilling sector is trending down, at record lows, and even the "survivors" such as RIG and Ensco (ESV) are selling off. The question is to know if it is a trading opportunity or just a sign that the industry is slowly dying? I choose to believe that it is an opportunity and the market is always slow to react positively.

Thus, I recommend a cautious accumulation for the long term.

According to OffshoreEnergyToday, we learn the following:

According to VesselsValue, an undisclosed charterer has hired Transocean's 2000-built semi-sub Deepwater Nautilus on August 8.

The drilling rig has been taken on a four-month deal, which will start on November 1 and end on February 28, 2017.

The semi-sub previously worked Shell in Malaysia on a contract that ran from May 2016, till August 2017, at a day rate of $456,000.

The contract was an extension of a previous contract with Shell, which ran since August 2012, till May 2016, on a maximum day rate of $531,000, which was subsequently downgraded to $456,000

The day rate for this new rig is undisclosed as well as the charterer. However, based on the Odfjell drilling contract indicated above, the day rate should run between $230k/d and $270k/d, in my opinion, with some mobilization fee.

Thus, based on an estimated $250K/d and 4-month contract, the total backlog should be around $30-$35 million including mob fee.

The offshore drilling industry is rapidly changing by necessity. The oil prices have forced the Industry to adapt to a new business environment with lower day rates often close to break-even level or even lower in some cases.

However, the offshore drilling market is well-known as a cyclical one, ups and downs will always affect the industry and it is not really a new issue. Just a matter of time and patience, believe me, I have been long enough in this insane market to tell you that it is a fact. Thus, we have only two choices available.

On the one hand, we do nothing and we complain and cry about the loss on paper due to a bad investment timing. On the other hand, we recognize the character inherently cyclical of the offshore drilling industry and use the same timing as an opportunity.

Important note: Do not forget to follow me on Transocean and other drillers. Thank you for your support.

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.

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Transocean - Evidence Suggests That Offshore Recovery Has Now Begun, But Stock Lags Behind - Seeking Alpha