Oil industry downturn since mid-2014 proved particularly taxing for the offshore drilling companies owing to receding activities and reduced day rates. However, with crude picking up momentum last year, offshore drilling giant Transocean Limited (RIG - Free Report) swung to a profit in the last reported quarter on the back of higher-than-anticipated revenues from the ultra-deepwater floaters. During the third quarter, the company announced that its backlog as of Oct 22, 2018 came in at $11.5 billion. Very recently, Transocean issued a new fleet status report, giving an insight into its impressive portfolio of drillships, recent contracts and backlog.
Digging Into the Details
The closure of Ocean Rig buyout in December 2018 further strengthened its portfolio, in turn expanding fleet size and quality. Notably, the acquisition gave Transocean 11 drillships along with two floating semi-submersible rigs.
The company’s fleet now owns 49 offshore drilling units, comprising 31 ultra-deepwater, 14 harsh environment, two deepwater and four mid-water floaters. Moreover, four ultra-deepwater drillships are currently under construction. It has 33% stake in a harsh environment semisubmersible. This enormous fleet is expected to boost Transocean’s long-term opportunities, helping the combined entity to penetrate into deep-and harsh-water markets more effectively.
While the company won a few small contracts since the last feet report in October 2018, the $830-million worth five-year drilling contract received from Chevron Corporation (CVX - Free Report) served as the fundamental component to boost its backlog. Per the contract, one of Transocean’s two dynamically positioned ultra-deepwater drillships, currently undergoing construction at Singapore’s Jurong shipyard, will commence operations from fourth-quarter 2021 to 2026-end. Expected to be the “industry’s most capable ultra-deepwater drillship,” it is likely to command a day rate of $455,000.
Moving on, the Deepwater Asgard rig, which operates for Murphy Oil Corporation (MUR - Free Report) , got a one-month extension and is currently expected to be in service within March 2019. Semi-sub deepwater drillship Nautilus, which is working for Royal Dutch Shell plc (RDS.A - Free Report) , also got an extension of two months and will be functional by March 2019.
Further, new contracts were awarded for drillships including Dhirubhai Deepwater KG2, Leiv Eriksson, Transocean Arctic, Discoverer India and Transocean 712.
Notably, the company plans to sell off its Ocean Rif Paros drillship. In fact, the company's focus on the removal of less-competitive rigs makes way for new high-specification assets, making its operations technically more capable.
Importantly, the company has clinched contracts worth $907 million, enhancing its total backlog from $12.2 billion since its last fleet report. The strong backlog reflects steady demand from customers, thereby boosting its earnings and cash flow visibility. Markedly, Transocean, sitting atop a record backlog, is the largest provider of offshore contract drilling services.
Will Gradual Offshore Recovery Bode Well for Transocean?
The offshore drilling industry had been one of the worst sufferers from the oil slump. With old contracts rolling off, the companies either had to get the rigs stacked or bear high reactivation costs and accept much reduced dayrates. As a result, overall revenues of the company were impacted.
However, offshore drilling, which was once expensive, has evolved over time and has become more economical than operating wells in every shale play. Sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet by strategic sell-offs and acquisition, seeking profitable collaborations, among other strategic strides, are aiding the prospects of the drilling companies. Although the sunny days of the offshore drilling industry are not expected to return immediately, signs of recovery can definitely be seen.
Per Rystad Energy, the Big Oil firms are likely to green light 110 offshore projects in 2019, up from 96, 62 and 43 in 2018, 2017 and 2016, respectively. While this is certainly going to boost the demand for rigs, it will mostly benefit the bigger oilfield service providers having an expertise in deepwater projects. Although the market is oversupplied and around 30% of the deepwater rigs may still remain idle this year, we believe Transocean is poised to capitalize on the gradual rise of offshore activities, as the company has been taking necessary steps to enhance its fleet with modern and competitive rigs, while scrapping off old and incompetent drillships. The acquisition of Songa and Ocean Rig bolstered the offshore game of Transocean to a considerable extent. With contracting activities picking up, Transocean expects dayrates for its ultra deepwater drillships to rise through 2019 and 2020, thereby boosting revenues and earnings.
Nonetheless, we know that crude oil prices have taken a beating since mid-October and are now hovering around $50-$55 a barrel amid concerns of economic slowdown, supply glut and U.S.-Sino trade tiff. However, the prices might witness a rebound over the next few months amid output cuts by OPEC along with lower-than-anticipated production from the shale plays in the United States. If the scenario is restored in the medium term, the unparallel fleet of Transocean — which is a Zacks Rank #3 (Hold) company — will position it to capitalize on market recovery, which is expected to give a new lease of life to deepwater drilling very soon. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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