Transocean’s Promising Deep-Water Future

by Aaron Levitt | September 12, 2012 7:30 am

As long-term global energy usage shows no signs of abating, the E&P industry continues to delve ever-deeper in its search for petroleum — a search that has pushed offshore drilling rigs to the limit.

And E&P firms must pay day-rates for renting the advanced drilling rigs needed to probe the deep waters for new deposits — rates that have risen to record highs[1] and are causing drillers to salivate at the opportunity.

The latest to seize that promise is rig-operator Transocean (NYSE:RIG[2]). Already, the firm’s fleet of 130 mobile offshore drilling rigs is considered to be one of the most modern and versatile in the world due to its focus on the specialized segment of offshore drilling.

Now, that concentration is getting even stronger as the company continues to hone in on its strategy of unloading older rigs and focusing on the higher end of the offshore-drilling market. Most recently, Transocean sold several shallow-water rigs, putting its fleet in a better position to capture those delicious deep-water profits.

While the firm isn’t without risk (Deepwater Horizon litigation, anyone[3]?), the asset sale strengthens its leadership position in ultra deep-water and could be exactly what the stock needs to finally begin its rebound. Investors may want to take notice.

Thirty-Eight Rigs

The aforementioned sale will mark the world’s largest rig operator’s exit from the market for rigs propped up on steel legs, or jack-ups, that it helped create more than 50 years ago. Transocean is selling 38 rigs[4] to Shelf Drilling International Holdings, a newly-formed company owned by private-equity investors and management. Shelf will pay $855 million in cash and $195 million in preferred shares for the rigs that can drill in shallow seas around 400 feet deep.

Despite the $1.05 billion price-tag for the assets, Transocean expects to recognize a “significant” loss on the sale as well as a non-cash charge to be included in its third-quarter 2012 results, since it valued the assets at around $1.4 billion at the end of the second quarter. It also plans to sell its remaining seven standard jack-up rigs and exit that business altogether in the third quarter.

Transocean’s CEO Steven L. Newman said[5], though, that the deal “marks an important milestone in our asset strategy and it will improve the company’s long-term competitiveness.”  And Transocean is already ahead of its goal of making between $500 million and $1 billion in low-end rig sales this year.

Deep-Water Is The Key

Transocean isn’t alone in this trend. As deep-water drilling has returned to the Gulf of Mexico[6] and spread across the world, a variety of contract drillers — like Ensco PLC (NYSE:ESV[7]) — have been able to roughly double day-rates.

While shallow-water drilling represents the steady-eddy play, deep-water drilling is where the growth is. Noble’s (NYSE:NE[8]) state-of-the-art Bob Douglas ultra deep-water rig and its $618,000-per-day rental price-tag is a prime example. So Newman’s strategy of shedding shallow-water rigs in order to focus on the deep-water segment makes plenty of sense.

Transocean’s specialized and technologically-advanced vessels that can operate in 10,000 feet of water and drill several miles underground can garner more than $400,000 a day — roughly four times the going rate for its jack-up rigs. Already, the majority of Transocean’s revenue is generated by its ultra deep-water high-specification fleet.

By shedding the lower margin rigs, the company has re-designed its asset base with a strict focus on high-specification floaters and jack-ups. Basically, it cut the fat from its operations to focus on future long-term profitability and the potential deep-water growth.

So far, Transocean’s stock is down nearly 50% since its Deepwater Horizon rig exploded back in 2010. And like BP (NYSE:BP[9]), the pending litigation stemming from the disaster has put a lid on shares. However — unlike BP[10] — Transocean’s liabilities are estimated to be significantly less than $38 billion and its recent asset sales make sense as long term strategy.

All-in-all, Transocean’s new strict concentration on the deep could finally be the necessary catalyst to move shares higher. For investors, it might be time to give the beleaguered driller a go.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

  1. have risen to record highs:
  2. RIG:
  3. Deepwater Horizon litigation, anyone:
  4. Transocean is selling 38 rigs:
  5. Steven L. Newman said:
  6. Gulf of Mexico:
  7. ESV:
  8. NE:
  9. BP:
  10. unlike BP:

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