How Transocean’s Recent Contracts Fit Its Strategy
Transocean (NYSE:RIG), the world’s largest offshore driller, reports the status of its fleet every month, highlighting new and renewed contracts. Here we examine some of the firm’s important contracts over the last two months and their implications.
The firm reported the addition of contracts worth a total of $1.1 billion in November and $119 million in its December fleet report. The dayrate increase for the contracts were relatively large, indicating that the market for offshore drilling remains quite strong. The firm also completed the sale of 37 standard jackups and one swamp barge to Shelf Drilling at the end of November, reducing its total fleet size to 82. [1]
US Gulf Of Mexico And Canada
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In its November update, the firm reported that it had extended a contract with Statoil (NYSE: STO) for an ultra-deepwater drillship in the US Gulf Of Mexico. The contract will extend an existing lease from 2014 to 2016. The day rate of $600,000 is almost 17% more than the previous rates and adds a revenue backlog of over $450 million.
Exploration activity in the Gulf of Mexico is strong, as higher oil prices are making it feasible for oil and gas companies to explore in deeper waters. This year, the region witnessed the highest number of deepwater drilling permits issued since 2007 and the rig count has risen by nearly 25% year-over-year.
The Gulf of Mexico is important for Transocean since it has around 16 rigs in operation in the region. Most of the rigs are ultra-deepwater drill ships, commanding dayrates between $400k to around $650k. Besides higher dayrates, deepwater rigs also usually experience higher utilization levels, adding significantly to the firm’s revenues. Most of the contracts in the region are also relatively long term (mostly between 2 to 3 years), effectively allowing the firm to reduce its mobilization and idle time.
Husky Energy (TSE: HSE) of Canada has also extended a contract with the firm for a midwater floater by 32 months. The contract will commence in 2013 with a dayrate of around $410,000 (about 40% higher than previous rate), adding a $394 million contract backlog.
Indonesian Contract
The firm will lease a high specification deepwater drillship to Inpex in Indonesia at a day rate of about $500,000 adding a contract backlog of around $90 million. Indonesia looks like a promising market for offshore drilling given that it is one of the world’s fastest growing economies and is one of the largest exporters of natural gas. Almost half its gas production (in 2009) came from offshore fields. [2] The government estimates that more than 70 percent of the country’s conventional gas reserves may be located offshore, providing significant future opportunities for Transocean. Most of the firm’s previous contracts in Indonesia were from jackup rigs, which have now been sold.
We have a price estimate of $56 for Transocean, which is around 20% ahead of the current market price.
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