Transocean (RIG)

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Transocean is the second-largest offshore drilling contractor in the world (by market cap). In the third quarter of 2009, the company owned 136 mobile offshore drilling platforms, including 42 high-specification floaters, 26 midwater floaters, 10 high-specification jackups, and 55 standard jackups. Transocean's rigs are floating, mobile drillships that the company rents, along with the equipment and personnel needed for operations, to oil and gas companies at a daily rate. The company manufactures drilling rigs for all depths, including deepwater, and has ten ultra-deepwater vessels in production - and it has higher dayrates and a vastly larger fleet than competitors like Noble and Diamond Offshore Drilling.^[1] Most of Transocean's drilling is occurring in the Far East, the U.K.., Middle East and the U.S. Gulf of Mexico, as well as parts of Africa and Asia.^[2]

President Barack Obama announced on March 31, 2010, that he would open up large swaths of the Eastern Seaboard to off-shore drilling. The proposal allows companies to lease land and drill for oil and natural gas from the tip of Florida to the northern end of Delaware, as well as certain locations in the Gulf of Mexico and by Alaska. The proposed bill would still protect regions that are considered to be delicate, and all drilling would take place only after research to determine the effect on the environment. Already the bill has been met with resistance by Republicans who say it does not go far enough, and with harsh criticism from environmentalists. The additional areas in the Gulf of Mexico could hold up to 3.5 billion barrels of oil and 17 trillion cubic feet of natural gas, but the start to any such drilling would still be several years off ^[3]

Business Financials

Fiscal Year 2010 Summary

In 2010, Transocean's net income was $988 million, a 69% decrease from the previous year, with operating revenues of $9.6 billion, a 17% decrease from the previous year. The Mexico drilling moratorium played a huge role in this decrease in productivity, as drilling activity lowered, out-of-service time for maintenance and repairs increased, and the revenues associated with the Deepwater Horizon contract were lost.^[4] The company predicts revenue in 2011 will be higher due to increased drilling activity arising from newbuilds and enhanced regulations, although the full impact of the regulations are uncertain.^[5]

Trends and Forces

As an oilfield services company, Transocean's fate is intimately connected to the fate of the oil industry as a whole.

Fire and Ensuing Oil Spill at Transocean and BP Deepwater Horizon rig illustrates potential costs of deepwater drilling offshore and has the potential of bringing forth more safety regulations

In April 2010, a major fire on an oil rig in the Gulf of Mexico owned by BP and operated by Transocean led to the largest oil spill in U.S. history^[6]. This has the potential to significantly hamper the development of deepwater offshore oil production and bring forth new safety regulations.^[7] People at Transocean believe the blaze was from an uncontrolled burst of oil and gas ("blowout") from the well. In 2007 to 2010, exploration in the Gulf region has increased as oil companies attempt to uncover new sources of oil deep under the ocean. ^[8] The number of deepwater rigs grew 43% over 2006 to April 2010. Oil produced from deepwater rigs has played an important role in U.S. oil and gas output. The Gulf of Mexico produces 30% of the U.S. oil output and is an important source of revenue for oil majors like BP.^[9] As offshore drilling has gained popularity, it has been harder for contractors to find experienced workers willing and able to work these rigs safely. Not only does the fire illustrate the potential dangers these rigs pose, but also it has the potential of creating more strict safety and environmental regulations to avoid possible dangers to human life and the surrounding marine environment.^[10]

Due to continued pressure from regulators in Switzerland, where Transocean is based, to postpone payouts to shareholders pending the outcome of liability issues related to the Deepwater Horizon incident, on August 13, 2010, Transocean stood down on $1 billion in dividend payments. The Commercial Register of the Canton of Zug, in Switzerland, rejected Transocean's application for dividend payments.^[11]

Transocean's Deepwater Services Depend on High Oil Prices

Oil prices soared over $100/barrel in early 2008, reaching a peak of $145.85 on July 3, 2008.^[12] As oil prices went up, oil companies like Shell, Chevron, and BP had greater incentives to increase production; thus, price shifts drove demand for exploration and drilling, and, thus, Transocean's business.

The hot trend in the oil industry is deepwater drilling - with shallower wells yielding less, oil and gas companies are paying large amounts of money to oilfield services companies who can drill where they previously could not. In 2009, oil prices took a dip, due to the financial crisis, averaging $62 per barrel, and unfortunately, as oil prices drop, demand for deepwater rigs slows, and even as day-rates drop, more and more deepwater rigs will sit idle.^[13] However, oil prices are rising again, averaging at $79 per barrel during first quarter 2010.^[14] Transocean has 48 deepwater drills, with 8 ultra-deepwater rigs in construction.^[15]

In a sign that oil and gas companies once more expect oil prices to rise, Transocean's semisubmersible rig, GSF Celtic Sea has been awarded a $350 million 3-year contract by an undisclosed customer for off-shore drilling near Angola commencing in the 2nd quarter of 2011. The GSF Celtic Sea is capable of operating in depths of 5750 feet, and drilling wells up to 25,000 feet deep ^[16]. This contract could portend increased demand for deepwater drilling amid rising oil prices, and have a positive effect on Transocean's revenues. In further evidence that gas companies expect oil prices to continue rising, Exxon XOM is looking to sign a 1 billion dollar contract with Transocean to build and rent a rig that is capable of drilling in the Arctic. The price represents a daily rate close to the record high that Transocean signed in mid-2008 when oil was near its peak.^[17]

Transocean Is Staying in the Water

Because Transocean is investing so much in its deepwater future (with 10 ultra-deepwater units in production in 2010)^[18], and ignoring other areas of oilfield services growth. The company is not investing as heavily in the Middle East as competitors like Weatherford International and Halliburton. There is tremendous growth in the region, as new technologies enable companies to extract more from the mature, onshore wells in the area. Transocean, however, has so far resisted growing into this region, and could as a result miss out on revenues from a growing market. On the flip side, however, the technology needed to succeed in the Middle East is expensive, and its success is dependent on high oil prices. Transocean has adopted a strategy of becoming one of the best in the more specific off-shore drilling rigs, and has resisted the urge to expand heavily into on-shore drilling. An added benefit for Transocean lies in the fact that most current deepwater sites are in relatively stable political environments, like the Gulf of Mexico and the UK's North Sea, where oil companies are more likely to want to drill because there is little to no risk of assets being nationalized or [[terrorism|attac

Red Sky at Morning, Transocean Investors Take Warning

With so much revenue coming from pulling oil and gas out of the Gulf of Mexico (see Business Financials), the hurricane season is always a bad time of year for the company. Third-quarter income is usually lower, as revenue tends to fall because production is brought down to prevent damage from the storms that sweep the coast in late summer. A similar risk lies in drilling in the turbulent U.K. North Sea, where the storm season generally coincides with a fourth-quarter decline in profitability as drilling costs rise.

The Transocean-GlobalSantaFe Merger Might Trigger Industry Consolidation

When Transocean merged with GlobalSantaFe, it created an industry giant. While this provides the company with a number of advantages, competitors will not take the move lightly. It's possible that the merger will intimidate other companies enough to trigger more mergers, creating more drilling companies with huge fleets. If other drilling companies, especially those involved in deepwater drilling, decided to consolidate, it's still up for debate whether less competition drives dayrates higher or drives these larger companies towards a more margin focused approach predicated on economies of scale.

Competition

Though the oilfield services sector consists of large companies like Schlumberger, Halliburton, Baker Hughes, and Weatherford International, Transocean more closely competes with offshore drilling companies like Noble and Diamond Offshore Drilling.

• Noble: 86% of Noble's fleet of 66 rigs were deployed internationally in early 2007^[19], with its markets ranging from the Gulf of Mexico to India, Mexico, the North Sea, the Middle East, and West Africa.
• Diamond Offshore Drilling: 21 of Diamond's 44 rigs were deployed in the American Gulf of Mexico^[20], with the rest divided between Brazil, Malaysia, Australia, New Zealand, Egypt, Vietnam, the North Sea, and the Middle East.
• Rowan Companies - Rowan's 21 jack-ups specialize in harsh environment, shallow-water drilling, and are deployed in the Gulf of Mexico, Middle East, North Sea, offshore eastern Canada, offshore West Africa, and Trinidad. The company also operates 29 onshore deep-well rigs.^[21]
• ENSCO International - ENSCO's fleet of 45 ships has an average age under seven years, making it one of the youngest in the industry.

All companies have deepwater-capable technologies, creating some competitive pressure for Transocean on that emerging front; to give perspective, however, one should note that Transocean's deepwater fleet alone is larger than Diamond's entire fleet. More threatening, possibly, are the entrances of the major oilfield services companies like Baker Hughes into the deepwater industry, as they have large amounts of capital with which to develop strong products and services.

Transocean also faces a threat from ChevronTexaco, as the oil major that is also one of Transocean's biggest customers has partnered with the Massachusetts Institute of Technology (MIT) to develop ultra-deepwater technology, indicating that the company might be moving towards establishing its own drilling business. This would both deny Transocean a major customer and create a new competitor for the company.

Notes

1. ↑ "Transocean Ltd. Reports Third Quarter 2009 Financial Results," Reuters.com, November 4, 2009
2. ↑ Transocean 2008 Annual Report Part I Pg. 5
3. ↑ [1] Will President Obama’s New Plans For Oil And Gas Exploration Have A Lasting Impact On Energy Stocks? March 31, 2010
4. ↑ RIG 2010 10-K Pg. 45
5. ↑ RIG 2010 10-K Pg. 42
6. ↑ [2]
7. ↑ WSJ: Blast Jolts Oil World, April 2010
8. ↑ WSJ: Blast Jolts Oil World, April 2010
9. ↑ WSJ: Blast Jolts Oil World, April 2010
10. ↑ WSJ: Blast Jolts Oil World, April 2010
11. ↑ Transocean stands down on $1 bln in dividend distributions
12. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
13. ↑ EIA: "Short-Term Energy Outlook"
14. ↑ "EIA Petroleum Navigator"
15. ↑ International Herald Tribune, July 24th, 2007
16. ↑ Transocean Ltd. Announces Deepwater Semisubmersible Rig GSF Celtic Sea Awarded Three-Year Contract December 18, 2009
17. ↑ Transocean Looks to Sign $1B Contract with Transocean January 8, 2010
18. ↑ Form 10-k 2009 Annual Report February 26, 2010
19. ↑ Reuters, Noble Corp NE, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=NE
20. ↑ Diamond Offshore Drilling Inc DO, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=DO
21. ↑ RDC 2007 10-K
22. ↑ RIG 2008 10-K
23. ↑ NE 2008 10-Q
24. ↑ Diamond Offshore Drilling 2008 10-k
25. ↑ RDC 2008 10-K
26. ↑ ESV 2008 10-K