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Aandeel Transocean Ltd ZSE:RIGN.CH, CH0048265513

Laatste koersSettlement koers (chf) 6,220 30 jun 2019 17:30
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Gaston Lagaffe 12 oktober 2017 15:29
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Transocean Will Raise $750 Million

Oct. 4, 2017 , Vladimir Zernov ++ SEEKING ALPHA ++

Transocean announces an offering of $750 million of senior unsecured notes due 2026.

The previous company's offering of unsecured notes was a fiasco.

This time, I expect much better results. The timing of the offering is good.

Transocean (RIG) has just announced that it commenced an offering of $750 million of senior unsecured notes due 2026. The company plans to use the proceeds to repay in full and retire 2.5% senior notes due Oct. 15, 2017, redeem all outstanding 6.00% senior notes due March 2018 and 7.375% senior notes due April 2018, repay in full the amounts outstanding on its Eksportfinans loans due January 2018, and for general corporate purposes. In total, the company will have to repay $630 million, so $100+ million (depending on fees) will be left for general corporate purposes.

This is the first time in recent company history that Transocean refinances at the right time. Brent oil (BNO) trades near the high of its range. The outlook for the offshore drilling industry has started to improve as seen from contract awards, purchases of exploration blocks, and increased M&A activity -- including the upcoming Ensco (ESV)/Atwood (ATW) merger and Transocean's own deal with Songa Offshore.

The previous notes that Transocean offered were $410 million senior secured notes due 2022, which had an interest rate of 5.52% and were secured by Deepwater Conqueror. These notes were of shorter duration and, more importantly, were secured by a modern rig. A more direct comparison will be the offering of $1.25 billion of senior unsecured notes due 2023 back in July 2016. That offering was almost a fiasco and received a whopping 9.00% interest rate.

As the outlook for offshore drilling has greatly improved since summer 2016, I expect a much better rate than in July 2016. However, the size of the improvement remains unclear. Recently, Diamond Offshore Drilling (DO) raised $500 million until 2025 at an interest rate of 7.875%. My expectation is that Transocean's interest rate will be better than the one achieved by Diamond Offshore.

This offering will be a major test for the market and I believe that other drillers will be closely watching the rate that Transocean is able to get. Soon, Ensco will be searching for refinancing as it will need to repay Atwood's debt. Ensco could use the available credit line or make a notes offering, depending on which method is more financially attractive. Other drillers, like Noble Corp. (NE), might also want to push their nearest maturities further into the future.

Transocean shares have had a good run off their lows reached in August, fueled by the upside in oil prices and some optimism regarding the next year's contracting activity in the floater space. In my opinion, the shares' ability to stay around current levels depends on Brent staying above $55. In case oil price dips below $55 and stays there, I expect a correction in Transocean shares.

Update: While this article was waiting for editorial approval, notes' pricing became available. I decided to leave the article as it was so that we can compare my initial expectations with reality.

The interest rate is 7.50% per annum. This pricing is better than the one that Diamond Offshore Drilling achieved. However, given the highly defensive acquisition of Songa and its backlog, I expected a bit more progress on the interest rate front. My conclusion? The debt market continues to view drillers as high-risk businesses. The market's view on drillers has changed a bit to the upside, but not much.

Disclosure: I am/we are long DO.

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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Gaston Lagaffe 12 oktober 2017 15:32
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Must-Own Oil Stock: Transocean

Oct. 3, 2017 , Leo Nelissen ++ SEEKING ALPHA ++

Transocean is one of those companies that got slaughtered after the oil peak of 2014.

However, backlog is back and new orders are piling up.

This is the number one stock to own during this oil rally.

On Sept. 1, I wrote an article about the fundamental bull case for oil and why this black commodity was facing an interesting breakout. In this article, I want to cover one of my favorite oil stocks -- Transocean (NYSE:RIG) -- and explain why this company is a real alpha machine during these times.

Break-Even Oil Prices Are Key

One of the most interesting trends we have seen -- and are still seeing -- since the oil peak of 2014 is the decline of break-even oil prices for both onshore and offshore drillers. This decline has been caused by excess equipment after the drilling activity decline and further advances in the field of drilling technologies. Transocean is seeing the same trend. Cost reduction has reduced spending in all key segments like engineering, well-related services, rotating equipment, subsea equipment and floating rigs. This has pushed break-even prices down from $91/bbl to $46/bbl.

Source: Transocean Investor Presentation

At this point, with oil above $50, it is safe to say that all but six Gulf of Mexico assets are currently safe. This include all projects for Shell (NYSE:RDS.A), for example.

Source: Transocean Investor Presentation

Once oil goes higher, you will see an even stronger outperformance of equipment and supplies providers since the pressure on balance sheets gets lighter. Equipment and services providers got beaten down even during certain oil rallies below $50, simply because the long-term outlook was bad. But I will elaborate on that later.

Backlog Is Back

Even though oil has been struggling since the bottom of the first quarter of 2016, it's safe to say that Transocean has seen very strong demand for its rigs. The second quarter of 2017 saw the highest demand since the fourth quarter of 2014, after both the first quarter of 2017 and the last quarter of 2016 saw multiyear highs.

Source: Transocean Investor Presentation

Add to that the rock solid backlog of Transocean after the acquisition of Songa Offshore.

Source: Transocean Investor Presentation

The company currently has $14.3 billion contract backlog with $2.7 billion in 2018. 90% of all contracts are made with investment grade companies -- always a good sign, but even better during times of crude oil weakness.

And just to show you the size of current and future contract compared to peers, it's interesting to look at the graph below. Transocean is roughly double the size of its biggest competitor Seadrill (SDRL).

Source: Transocean Investor Presentation

Pending Sales Recovery

At this point, I believe that sales have bottomed. Backlog orders, new orders, and the recovering activity in the offshore drilling business will push sales back to over $1 billion over the next two quarters, in my opinion. After that, the way is open for $1.33 billion in 2018.

ChartRIG data by YCharts

This sales recovery would come after a 65% revenue decline since the first quarter of 2015 (when oil really started to break down). Note that EBITDA has already bottomed with EBITDA margins at 50% vs. 40% in the fourth quarter of 2015.

Source: Transocean Investor Presentation

Your Oil Play

By going long Transocean, you are first of all buying into an outperforming industry during oil rallies. Equipment and services tend to run really well once companies start investing again. In addition to that, you are benefiting from falling offshore break-even prices and the fact that Transocean has been demolished since the oil peak of 2014.

However, note that even though we are witnessing a breakout, the company has rallied roughly 45% from the August 2017 bottom. This means that a short-term dip could offer a great entry since the company is not even close to ending this long-term uptrend.

Thank you for reading my article. Please leave a comment below if you have questions or remarks.

Disclaimer: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RIG over 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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Gaston Lagaffe 24 oktober 2017 11:31
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Is The Recent Plunge Of Transocean Justified?

Oct. 23, 2017,Aristofanis Papadatos +++ Seeking Alpha +++

Summary

Transocean plunged 10% last week.

It signed a contract for a modern rig with a markedly disappointing dayrate.

Off-shore drillers have drastically reduced their break-even points during the ongoing downturn of the sector.

However, the time to bring offshore projects to production is still several years, whereas shale oil fields come to production in just a few months.

Transocean (RIG) plunged 10% last week and thus interrupted its rebound off its all-time lows. The major reason was the contract it signed for its ultra-deepwater drillship Deepwater Invictus at a dayrate of $145 K. The news was extremely disappointing, as the dayrate was 75% lower than the current rate while the drillship is a modern rig built in 2014. Nevertheless, the big question is whether the market has overreacted or the recent plunge is justified.

First of all, the shareholders of all the off-shore drillers have been experiencing endless pain during the last three years. To be sure, the stocks of all the off-shore drillers have been decimated during the ongoing downturn of the sector. For instance, Transocean has lost 80% in the last 4 years. However, it will be extremely risky to conclude that these stocks have become bargains thanks to their compression. As the shareholders of Seadrill (SDRL) have learnt the hard way, stocks do not always recover. Therefore, the shareholders of Transocean should carefully evaluate the business prospects of the company before deciding whether to hold their shares.

During the ongoing downturn in the oil market, off-shore drillers have managed to drastically reduce their costs. Consequently, they have reduced the average breakeven point for a series of offshore projects from $91 per barrel to $46 per barrel. However, in the meantime, shale oil producers have been doing the same and hence the output of shale oil producers has kept climbing and currently stands near its all-time highs. Moreover, the US Energy Information Administration currently expects a record output in 2018, with most of the new output coming from the Permian region. Therefore, despite the drastic cost cuts of off-shore drillers, the deepwater projects continue to face huge competitive pressure from shale oil producers.

As both off-shore drillers and shale oil producers have markedly lowered their breakeven points, most investors will erroneously conclude that it is uncertain which category will eventually prevail. The key is to realize that the time to bring offshore projects to production is still several years, whereas shale oil fields come to production in just a few months. This is a key differentiator between the two types of producers. As no-one can forecast future oil prices with any degree of accuracy, the great lag between investment and production renders offshore drilling a much riskier investing endeavor. As a result, oil producers are much more likely to invest in inland fields than in deepwater projects.

This key weakness of deepwater projects is already prominent. More precisely, Transocean recently announced that it will take a $1.4 B impairment charge in Q3 to cover the costs of retiring 6 rigs. In addition, offshore drillers junked more rigs in Q3 than they ever did in a 90-day period. Furthermore, the worst evidence for the pressure facing deepwater projects is the astonishingly low dayrate that Transocean booked for its new drillship, as mentioned in the beginning. This dayrate certainly leads to the conclusion that this investment of Transocean was very poorly timed and is not likely to prove profitable anytime soon.

It is also worth noting that Transocean has a markedly weak balance sheet. On the bright side, its current assets of $4.3 B by far exceed its current liabilities of $1.8 B so there is no short-term liquidity problem. However, on the other hand, its net debt (as per Buffett, net debt = total liabilities – cash – receivables) stands at $6.5 B and hence the interest expense clearly burdens the company. To be sure, during the first half of the year, the adjusted operating income of the company was $222 M while the interest expense was 256 M. Therefore, the interest expense “ate” the whole operating income and more and hence the company incurred losses. Even worse, as the revenues are expected to remain in a downtrend, the bottom line is only likely to deteriorate. The weak financial condition of Transocean is clearly reflected even in the outlook of its own management. More specifically, its management expects the cash of the company to decrease from its current level of $2.2 B to about $1.0 B within the next two years.

It is also remarkable that the company still has elevated capital expenses, which are estimated around $700 M for the next two years. This only proves the very poor timing of its past investment decisions. Nevertheless, apart from this poor timing, the management of Transocean is doing its best in reducing its cost base and in essence it is doing its best in everything it can influence. Unfortunately, this is the worst part for the company; more precisely, even if the company does its best from now on, it can hardly affect its own fate, as the latter largely depends on the future path of the oil price. If the price of oil does not experience a sustained rebound above $60, then Transocean will not enjoy a meaningful rebound in its business. And although OPEC has made great efforts in supporting the oil price, the cartel has lost most of its pricing power due to the boom of shale oil. As a result, whenever the price of oil rises above $50, the shale oil output increases and thus puts a cap on the oil price. Consequently, a sustainable rally of the oil price does not look likely on the horizon and hence Transocean should not expect its business conditions to improve anytime soon.

To sum up, the collapse of the dayrate of the ultra-deepwater drillship of Transocean is a confirmation of its gloomy prospects. Therefore, the recent plunge of the stock is justified. While the company is doing its best in the things it can affect, its fate is out of its control, as it depends on the future path of the oil price. Of course no-one can exclude a temporary rebound off the current depressed level of the stock. However, given the high leverage of the company and the absence of bottoming conditions in deepwater drilling, Transocean remains a highly risky, leveraged play on the oil price.

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Gaston Lagaffe 24 oktober 2017 11:35
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Transocean - Is There Anything Wrong With This Move?

Oct. 19, 2017 Fun Trading +++ Seeking Alpha +++

Summary

Transocean announced that the ultra-deepwater drillship Deepwater Invictus was awarded a two-year contract plus three one-year priced options with a subsidiary of BHP Billiton.

To understand the situation and evaluate the nature and impact of such contract, investors must look at the day rate mix or blend of the Transocean backlog.

The stock has experienced a fantastic run up since September and it is rather normal and even healthy to see a consolidation going on now to perhaps $9.

Transocean (RIG) - The Deepwater Invictus.

Gross Tonnage: 68034: Deadweight: 62918 t: Length Overall x Breadth Extreme:238m × 42.04m: Year Built: 2014

Investment Thesis

It is not a secret, the offshore drilling industry is not doing well and drillers are struggling to survive while waiting for an elusive recovery that appears to slip further away due to a stubborn low oil price environment, which is not enough to push oil majors to invest tremendously in offshore exploration capex.

ChartBrent Crude Oil Spot Price data by YCharts

However, the market is far from being dead and I have noticed some tendering activity the past few months, especially in the jack-up segment, and recently shifting to the floater sector as well.

Thus, trends signaling a rig market recovery have emerged this year. Rig contracting activity and utilization are on the rise, asset values are increasing, crude oil benchmark prices held relatively stable, albeit not sufficient enough to trigger new activity on their own. The caveat lector is that this recovery comes at a cost and it is called sinking day rates to entice offshore drilling that otherwise would not have happened.

However, the conclusion is that offshore drillers could be at the bottom, and it is perhaps time to invest in this sector again for the long-term while the stock prices are showing multi-year lows. Transocean is definitely one of the best offshore driller exhibiting a record backlog that will be well over $14 billion after the acquisition of Songa offshore will be completed. Read my article here.

The News:

On October 17, 2017, According to Transocean:

Transocean Ltd., announced today that the ultra-deepwater drillship Deepwater Invictus was awarded a two-year contract plus three one-year priced options with a subsidiary of BHP Billiton. The backlog associated with the firm contract is approximately $106 million. The contract is expected to commence in the second quarter of 2018.
Quick calculation: $106 million / (2 x 365 days) is $145.2K /day. Not including mobilization that could fetch $25 million or more. Contract commencing around April-May 2018. RIG secured also three One-year priced options, potentially pushing the contract to 2023.

This day rate is consistent with the Markit day rate average between July and August when the contract was probably negotiated, which is a range $130k/d-$170k/d.

In this same struggling category and for comparison purpose only, Ocean Rig UDW (ORIG) indicated on October 13, 2017, that It has contracted the Ocean Rig Poseidon to Statoil off the coast of Tanzania, for a one-well contract at about $145k/d to $150k/d (Estimated by Fun trading). However, this is not the lowest ever we can find recently and ONGC always manages to get even cheaper.

The lowest day rate for one ultra-deepwater drillship has been agreed by Vantage Drilling and India's ONGC in January 2017 for the Platinium Explorer. ONGC has secured the rig for three years for $118 million, which translates to a day rate below $110,000 per day.
Transocean Powerful Backlog:

First, let's look at the company's firm backlog. It is now $9.5 billion estimated as of October 19, 2017. Wait! This backlog will be around $14 billion (Excluding options) when the Songa offshore acquisition will be finalized.

Note: If the acquisition of Songa Offshore is completed in 4Q'17. The total backlog will be over $14 billion.

Note: Transocean sold its Jack-up segment to Borr Drilling but is still getting some remaining backlog.

The Company's backlog is paramount to understand what is going on, thus it should be analyzed before any consideration. Transocean

Importance of the drilling day rate mix

To understand the situation and evaluate the nature and impact of such contract, investors must look at the day rate mix or blend of the Transocean backlog. To get a clear idea of the subject, let's look at the average day rate history (from the 10K).

UDW Drillships 2014 2015 2016 2017-2027 Fun trading
In $K/d 538.4 513.9 492.1 485~
In fact, the total contract days for the UDW Drillship is estimated at below 17,800 days for a total backlog of about $8,679 million. The shell contracts, for example, represent a day rate averaging over $500k/d for a total of about $6+ billion.
Even if these contracts happen to be terminated for convenience by Shell, the company will get about 80% or more of the total value of the contract as compensation.

Conclusion:

To really assess the impact of such contract, it is of a paramount importance to place this single event in a wider context. This is what I have tried to explain above.
Thence, we realize easily that Transocean business decision to contract the UDW Invictus for the next two years and perhaps longer at a low day rate is, in fact, the right and only decision that makes sense.

Studying the long-term, the day rates will fluctuate up and down depending on the oil price environment. Perhaps in three years from now, day rate will be above $400k/d again or even more, we have no way to be certain of that. However, Transocean must deal with the present situation and by contracting valuable assets at the day rate "du jour" is still a positive.

The stock has experienced a fantastic run up since September and it is rather normal and even healthy to see a consolidation going on now to perhaps $9.

I do not consider this contract will make a difference and any weakness should be used to accumulate again.

Note: I have taken some profit off the table at the end of September around $10.70 when the RSI was above 75 (overbought situation). I see a re-test of the MA50 at around $9.25, at which point I may buy back again.

Important note: Do not forget to follow me on RIG and other offshore drillers. Thank you for your support, it is appreciated.

Disclosure: I am/we are long RIG.

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Gaston Lagaffe 24 oktober 2017 11:38
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Transocean Secures New Drillship Contract At Disappointing Dayrate

Oct. 18, 2017 3:14 Henrik Alex +++ Seeking Alpha +++

Summary

Enters into new two-year contract with existing customer BHP Biliton.

Disclosed backlog addition of $106 million calculates to a disappointing dayrate of just $145,000.

Contract terms, again, contradict management's ongoing narrative of an impending industry recovery.

Large overcapacities, particularly in the ultra-deepwater segment, will continue to prevent the industry from regaining meaningful pricing power in the foreseeable future.

Recent debt management measures and a slew of other, highly defensive moves like the expensive acquisition of Songa Offshore have positioned Transocean to stay afloat well into the next decade - even under ongoing weak industry conditions.

Note:

I have covered Transocean (NYSE:RIG) previously, so investors should view this article as an update to my earlier publishings on the company.

Well, here's the good news:

Leading offshore driller Transocean managed to secure a new two-year contract for its latest generation ultra-deepwater drillship Deepwater Invictus with BHP Biliton (NYSE:BHP) which is expected to commence in the second quarter of 2018. In addition, the customer was granted three one-year priced options which, most likely, contain tiered pricing increases.

And now to the bad news:

The contract was signed at a rock-bottom dayrate of just around $145,000 which roughly equals the rig's estimated operating cash flow break-even rate, down an eye-catching 75% from the current rate of $592,000, also with BHP Biliton.

Photo: Latest generation ultra-deepwater drillship Deepwater Invictus - Source: Offshore Energy Today

While Transocean, clearly, deserves some kudos for being transparent and disclosing the dayrate (certainly not a given anymore in the current environment), this contract is just another evidence for the ongoing pitiful state of the industry and Transocean's true assessment regarding the timing of a potential recovery.

As a reminder:

For already a couple of quarters now, CEO Jeremy Thigpen has repeatedly told investors and analysts that an industry recovery might be just around the corner but in stark contrast to management's ongoing narrative, virtually all of the company's recent moves have been purely defensive including the decision to acquire tiny Norway-based Songa Offshore at a truly breathtaking price.

The purchase of Songa was solely done for the company's $4 billion backlog with Statoil (NYSE:STO) and holds basically no short- or medium term strategic upside as Songa's rigs will either be scrapped or remain on contract with Statoil for many years going forward. In exchange, Transocean agreed to assign more than 30% of the combined company to current Songa shareholders.

Personally, I would have thought that Transocean would manage to extend the contract with this particular customer at rather favorable conditions as BHP Biliton has been one of the very few companies which actually increased their commitment to offshore exploration in the Gulf of Mexico over the course of the ongoing downturn. Moreover, the drillship has been under contract with BHP Biliton since its commissioning in 2014 and performed successfully over the past three years so I would have expected Transocean to have at least some bargaining power in this particular situation.

But as it has turned out, this was not the case as Transocean not only agreed to one of lowest publicly-disclosed dayrates for a latest generation ultra-deepwater drillship ever but also committed to an initial two-year contract term which will keep the rig working at cash flow break-even rates well into 2020.

Moreover, with the current high-margin contract with BHP Biliton currently scheduled to end in November, the rig will, most likely, sit idle for a couple of months or might even have to undergo some upgrades in preparation for the new contract.

Clearly, despite management's ongoing narrative of an impending industry recovery, Transocean does not expect any improvement in deepwater exploration dayrates before the end of the decade.

Meanwhile, the company continues to extend debt maturities well into the next decade and remains committed to renewing its currently undrawn revolving credit facility next year.

Going forward, the company's substantial debt service requirements will remain a competitive disadvantage, particularly when compared to already or soon to be restructured peers like Ocean Rig (NASDAQ:ORIG), Seadrill (NYSE:SDRL) and Pacific Drilling (NYSE:PACD).

That said, the latest slew of defensive moves has positioned Transocean to remain afloat, even under ongoing poor industry conditions, for at least another couple of years.

Bottom line:

Transocean secures a new two-year ultra-deepwater exploration contract with existing customer BHP Biliton at a rather disappointing dayrate. The contract terms, once again, contradict management's ongoing narrative of an impending industry recovery.

Clearly, Transocean does not expect any meaningful improvement for deepwater exploration dayrates before the next decade.

That said, predicting the share price movement of offshore drillers remains an easy exercise - if oil recovers even further, the group will follow suit regardless of ongoing overcapacities in the industry that do not allow for meaningful price increases, particularly in the ultra-deepwater segment, anytime soon.

But should oil prices reverse course once again, there could be very substantial downside for the group as a whole, particularly in light of the recent 35-50% rise in share prices over the past couple of weeks.

Disclosure: I am/we are long SDLP.

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Gaston Lagaffe 24 oktober 2017 11:40
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Transocean upgraded, Diamond Offshore downgraded in Citi pair trade

Oct. 12, 2017 SA News Editor +++ Seeking Alpha +++

Transocean (RIG -0.9%) is upgraded to Buy from Neutral with a $14 price target, hoisted from $8.80, at Citigroup, which says if an upturn is forthcoming, the stock should outperform given a "diminution" of concern toward its balance sheet and more new contract catalysts.

The upgrade is part of a pair trade by Citi analyst Scott Gruber, who also downgrades Diamond Offshore (DO -3.1%) to Sell from Neutral with a $12 price target, with DO likely to underperform if the downturn persists as its backlog is consumed.

Gruber believes DO is "simply overvalued," while RIG is the "industry leader who's ready to lead."

Oil and gas related shares are broadly lower today as crude prices fall sharply.

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Gaston Lagaffe 24 oktober 2017 11:43
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Transocean Gets A 2-Year Job From BHP, Agrees To 75% Discount From Previous Rate

Oct. 18, 2017 Vladimir Zernov +++ Seeking Alpha +++

Summary

As I expected, Transocean got a contract from BHP Billiton.

BHP got a great deal, securing a modern rig at a very cheap dayrate.

This contract is a vivid evidence of the current state of the offshore drilling market.

When I wrote “Transocean May Soon Get A Job From BHP” I did not think it will happen so fast. In fact, I was not a hundred percent sure that it will happen at all – a forecast always involves probability and real life may differ materially from prognosis. However, I got it right this time – Transocean (RIG) has just announced that Deepwater Invictus was awarded a two-year contract plus three one-year priced options with BHP Billiton (BHP).

This is a very significant contract as, in the best-case scenario, it will keep Deepwater Invictus busy for 5 years. The backlog associated with the firm contract is $106 million and the job starts in the second quarter of 2018. The only problem is the dayrate. Transocean’s $106 million of revenue for 2 years of work calculate to just $145,000 per day. Currently, Deepwater Invictus is on the contract with BHP until November 2017. The dayrate is $592,000, so the dayrate reduction is a whopping 75%.

This is a wonderful deal for BHP Billiton, which has just secured a modern rig built in 2014 at a 75% discount to the dayrate of a better era for offshore drillers. I recently wrote “Ocean Rig (NASDAQ:ORIG) Bids Below Market – A Warning To Competition”, where I calculated a dayrate for Ocean Rig Poseidon at just $116,000. However, there is a big difference between Ocean Rig’s and Transocean’s situation. Ocean Rig has to keep Ocean Rig Poseidon hot as it has few working rigs in the fleet. Thus, it agreed to a short-term contract at a level below its cash breakeven. In comparison, Transocean had a working relationship with BHP and committed the rig that was already working for BHP at $145,000 for two years. I wonder if any money will be made in the first two years of this contract.

The recent news is sobering to anyone who thought that the market recovery was just around the corner. The floater competition is simply cutthroat. While the contracting activity is on the rise, the dayrates are clearly not. The dayrate achieved by Transocean is simply disappointing. We can only wonder how low the non-disclosed rates are on Transocean’s fleet status report.

Frankly, I thought that Transocean will be able to get a dayrate north of $150,000 with BHP. The reason for this is that the rig has already been working with the company, and typically companies want to pay a premium for the rig that they already know. Also, the duration of the job is significant, which should (in theory) positively impact the dayrate. However, the environment in the floater market is so challenging that it seems that Transocean had to compete on rate.

Remember this graph from Seadrill’s (SDRL) restructuring presentation?

Dayrate predictions on the graph above are way off, at least for 2017 – 2018. Recent drillship fixtures show that floater rates are nowhere near the $180,000 average presented as “current” rates in Seadrill’s scenario. This raises a multitude of questions. For example, how feasible is Seadrill’s restructuring plan, which leaves the company highly leveraged? Or, is the recent rally in leading offshore drilling stocks, such as Transocean, Diamond Offshore Drilling (DO) and Rowan (RDC) justified? It’s also interesting to know what kind of rates will Ensco (ESV) get for Atwood (ATW) drillships when (and if) it is able to contract them?

Under other circumstances I’d say that getting a 2-year contract with 3-year priced options is great for Transocean and that the stock will have more upside, but the low dayrate hurts the upside. There is no doubt that a contract is much better than nothing under current circumstances. It is also good for the whole industry as one rig leaves the market for, hopefully, five years. However, the rate is just too low to bring anything material to the company’s bottom line. Partially, such a rate explains why Transocean chose to acquire Songa Offshore which had a very significant backlog. Current rates are so low and the competition is so intense that the company chose the safe route of backlog acquisition.

All in all, I believe that the contract is news not only for Transocean but for the whole industry. The competition is very intense and even the leading drillers get very low dayrates. The marketplace might become even more crowded after Pacific Drilling (OTCPK:PACDF) completes its restructuring and becomes an “eligible driller” like Ocean Rig has become after the completion of its own restructuring. In comparison with Ocean Rig, Pacific Drilling is holding all non-working rigs in the warm stack state, so the company’s restructuring will materially increase the competition in the floater market.

Brent oil (BNO) prices, which currently fluctuate around $58 per barrel, will continue to provide support for Transocean shares. However, the fundamental situation remains challenging as highlighted by Deepwater Invictus contract.

Disclosure: I am/we are long DO, RDC.

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Gaston Lagaffe 24 oktober 2017 11:45
   Gaston Lagaffe

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How Does Transocean Stack Up?

Oct. 16, 2017 ValueAnalyst +++ Seeking Alpha +++

Summary

Transocean is a leader in the offshore drilling industry.

The company handled the severe downturn especially well, and with its recent acquisition of Songa, it is well positioned to benefit from the upcoming recovery.

I rate the company HOLD due to the reasons discussed in this article.

Transocean (RIG) stock price has performed in-line with those of Diamond Offshore (DO) and Rowan (RDC), which together have significantly outperformed those of Ensco (ESV) and Noble (NE) in the last three months:

Chart
RIG data by YCharts
As the above graph shows, the performance divergence in stock prices of the two groups of offshore drillers has emerged in August and widened dramatically since the beginning of October.

A similar divergence is seen in the companies' price-to-book ratios, which is one of the more than two dozen fundamental factors I follow, especially in asset-heavy industries:

Chart
RIG Price to Book Value data by YCharts
The above graph tells me that the divergence in the stock prices may be primarily driven by market sentiment, instead of changes in fundamental factors. It is important to note, however, that no single fundamental indicator is the be-all and end-all of investing and that investors should continuously search for indications that disprove their hypotheses.

Recent Financial And Operational Results

Fellow Seeking Alpha contributor, Fun Trading, recently did a nice job of discussing Transocean's 2Q17 results in this article, so I won't regurgitate the information, as I agree with Fun Trading analysis of the company's fundamentals.

In that article, Fun Trading discussed the company's backlog and financial results, and concluded:

RIG is slowly bottoming out now and I expect the stock to trend up in the next few months, assuming a positive outlook for the oil prices which is far from certain. I recommend to accumulate the stock on any weakness below $9.
Since the article was published, Transocean's stock price declined from just above $9 per share to $7.20 per share, before rebounding strongly thereafter to nearly $11 per share, which is where it currently trades.

Acquisition of Songa Offshore

Just like when Ensco (ESV) acquired Atwood (ATW), Transocean recently leveraged its industry leadership position, along with the benefit of having been conservative leading up to a severe industrywide downturn, to acquire Songa Offshore.

As a result of this accretive acquisition, the company added more than $4 billion of backlog, which extends into 2024. Transocean today enjoys a combined backlog of $14.3 billion and liquidity of $5.2 billion with a vast fleet of ultra-deepwater and harsh environment floaters.

Source: Transocean Investor Relations

The company is well positioned to benefit from the fledgling recovery in the offshore drilling industry, especially in the ultra-deepwater segment.

Valuation

The following graph illustrates the price-to-book ratios of Transocean and its peers:

Chart
RIG Price to Book Value data by YCharts
Readers should note that Diamond is in a league of its own with a price-to-book ratio of more than 0.5x, in the second group are Rowan and Transocean with ratios of approximately 0.3x, and "cheapest" are Ensco and Noble.

The relative valuation illustrated above is likely why Transocean was recently upgraded to Buy from Neutral with a $14 price target by Citigroup, which said that if an upturn is forthcoming, the stock should outperform given a "diminution" of concern toward its balance sheet and more new contract catalysts.

I recently rated Diamond a HOLD due to the reasons I discussed in my recent article, Diamond Offshore: Significant Accumulation, so I disagree with the Citigroup analyst that Diamond should be sold for a pair trade.

Having said that, however, I also rate Transocean a HOLD, because of its relatively high valuation compared to Ensco and Noble.

I expect the rising tide in oil prices to lift all offshore boats (pun intended; not sure why people don't claim puns when they run into one), and I would rather invest in companies that were hit hard on the way down, despite their relatively higher balance sheet risk if oil prices remain "lower for longer."

Key Assumption

Readers should note that my projection depends on an expectation of higher oil prices in the coming months, above the all-important $60-65 range as noted by many offshore drillers. As I discussed in my article "Is Oil Boiling Under The Surface?" I expect global oil demand growth to surprise to the upside and global oil supply to surprise to the downside in 2017 and 2018. Data released since my article was published in July supports my expectation as oil inventories have continued to decline at a higher rate than expected.

If you'd like to cruise through my nearly two dozen articles on oil markets, please visit my author page for a comprehensive list, but I specifically recommend: (1) Is Oil Boiling Under The Surface?, (2) Expect Global Oil Production Growth To Slow Down, and (3) Significant Oil Demand Revisions, all of which are recent and provide investors with a solid discussion of my oil price expectations. Specifically, I expect WTI and Brent crude oil prices to reach $70 and $72 per barrel by year-end, as the oil glut continues to decline.

Bottom Line

I expect most offshore drillers to outperform the energy sector (XLE) and the major indices in the coming months. Transocean is well positioned as an industry leader to benefit handsomely from the fledgling recovery in the offshore drilling industry. Having said that, however, I rate Transocean a HOLD, because of its relatively higher valuation compared to Ensco and Noble.

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Disclosure: I am/we are long TSLA, ESV, NE

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Gaston Lagaffe 24 oktober 2017 11:48
   Gaston Lagaffe

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Must-Own Oil Stock: Transocean

Oct. 3, 2017 Leo Nelissen / BN Capital +++ Seeking Alpha +++

Summary

Transocean is one of those companies that got slaughtered after the oil peak of 2014.

However, backlog is back and new orders are piling up.

This is the number one stock to own during this oil rally.

On Sept. 1, I wrote an article about the fundamental bull case for oil and why this black commodity was facing an interesting breakout. In this article, I want to cover one of my favorite oil stocks -- Transocean (NYSE:RIG) -- and explain why this company is a real alpha machine during these times.

Break-Even Oil Prices Are Key

One of the most interesting trends we have seen -- and are still seeing -- since the oil peak of 2014 is the decline of break-even oil prices for both onshore and offshore drillers. This decline has been caused by excess equipment after the drilling activity decline and further advances in the field of drilling technologies. Transocean is seeing the same trend. Cost reduction has reduced spending in all key segments like engineering, well-related services, rotating equipment, subsea equipment and floating rigs. This has pushed break-even prices down from $91/bbl to $46/bbl.

Source: Transocean Investor Presentation

At this point, with oil above $50, it is safe to say that all but six Gulf of Mexico assets are currently safe. This include all projects for Shell (NYSE:RDS.A), for example.

Source: Transocean Investor Presentation

Once oil goes higher, you will see an even stronger outperformance of equipment and supplies providers since the pressure on balance sheets gets lighter. Equipment and services providers got beaten down even during certain oil rallies below $50, simply because the long-term outlook was bad. But I will elaborate on that later.

Backlog Is Back

Even though oil has been struggling since the bottom of the first quarter of 2016, it's safe to say that Transocean has seen very strong demand for its rigs. The second quarter of 2017 saw the highest demand since the fourth quarter of 2014, after both the first quarter of 2017 and the last quarter of 2016 saw multiyear highs.

Source: Transocean Investor Presentation

Add to that the rock solid backlog of Transocean after the acquisition of Songa Offshore.

Source: Transocean Investor Presentation

The company currently has $14.3 billion contract backlog with $2.7 billion in 2018. 90% of all contracts are made with investment grade companies -- always a good sign, but even better during times of crude oil weakness.

And just to show you the size of current and future contract compared to peers, it's interesting to look at the graph below. Transocean is roughly double the size of its biggest competitor Seadrill (SDRL).

Source: Transocean Investor Presentation

Pending Sales Recovery

At this point, I believe that sales have bottomed. Backlog orders, new orders, and the recovering activity in the offshore drilling business will push sales back to over $1 billion over the next two quarters, in my opinion. After that, the way is open for $1.33 billion in 2018.

ChartRIG data by YCharts

This sales recovery would come after a 65% revenue decline since the first quarter of 2015 (when oil really started to break down). Note that EBITDA has already bottomed with EBITDA margins at 50% vs. 40% in the fourth quarter of 2015.

Source: Transocean Investor Presentation

Your Oil Play

By going long Transocean, you are first of all buying into an outperforming industry during oil rallies. Equipment and services tend to run really well once companies start investing again. In addition to that, you are benefiting from falling offshore break-even prices and the fact that Transocean has been demolished since the oil peak of 2014.

However, note that even though we are witnessing a breakout, the company has rallied roughly 45% from the August 2017 bottom. This means that a short-term dip could offer a great entry since the company is not even close to ending this long-term uptrend.

Thank you for reading my article. Please leave a comment below if you have questions or remarks.

Disclaimer: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

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