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WIKI ANALYSIS
Transocean is the second-largest offshore drilling contractor in the world (by market cap). In the second quarter of 2009, the company owned 133 mobile offshore drilling platforms, including 39 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]
Business Financials
At the end of the second quarter of 2009 operating revenue was down 7% to $2.88 billion and net income was down 24% to $806 million, as compared to the same period in 2008. However, average daily revenue was up 10% to $255,900 due to previously executed contracts and utilization dropped 3% to 84%, as compared to second quarter of 2008.[3] Contract backlog was down 6% from the previous quarter to $33.7 billion. Demand for high-specification floaters has remained high with only 5% of its fleet uncommitted, however demand for standard jack ups is very low with 42% of the company's fleet uncommitted.[4]
Near the end of the second quarter of 2009 Transocean expanded its presence in Brazil through the signing of a new contract with Petrobras (PBR). The contract was for an ultra-deepwater semisubmersible rig for operations in Brazil for three years, with the option of being converted into a five year contract. Revenues for the contract would be $558.5 million for the three year and if elected, $894.3 million for the five year contract.[5]
In the first quarter of 2009 net income was $942 million after adjusting for costs of $264 million which included costs related with its merger with Global SantaFe (GSF), tax items and impairment of drilling vessels. At the end of the quarter Transocean had a contract backlog of $38 billion.[6]
At the end of 2008 net income was $4.2 billion up 25.7% from 2007. The increase was primarily due to the realization of GlobalSanteFe's operations for an entire year and higher dayrates.[7]
In the second quarter of 2008, Transocean saw dayrates rise 4% from the first quarter[8], while net income approximately doubled year-on-year, to $1.11 billion.[9] Revenues were $3.102 billion[10], down from $3.110 billion in 1Q08.[10] Backlog grew by $7 billion, to a record $41 billion.[10] The company increased its number of rigs in construction to 10 ultra-deepwater units.[10]
| Financials ($ Million) and Geographic Breakdown[11] | |||
| 2006 | 2007 | 2008 | |
| Operating Revenue | 3,882 | 6,377 | 12,674 |
| U.S. | 806 | 1,259 | 2,578 |
| U.K. | 439 | 848 | 2,012 |
| Nigeria | 447 | 587 | 1,096 |
| India | 291 | 761 | 890 |
| Other | 1,899 | 2,922 | 6,098 |
| Operating Income | 1,641 | 3,239 | 5,357 |
In the first quarter of 2008, the company had net income of $1.189 billion, up from 4Q07's $1.056 billion; aside from rising oil prices driving up dayrates, 1Q08 was the first time that the company's financial reports reflected GlobalSantaFe's operations throughout the quarter. Revenues increased from $2.77 billion to $3.11 billion; $919 million of this increase was caused by the inclusion of GlobalSantaFe. These revenues benefited from delays in maintenance on four ships, which indicates that gains in 2Q08 might be offset by increased spending and lower cash flow from operations.
Also, in the first quarter of 2008, Transocean expanded its operations in India, leasing two deepwater vessels in five-year contracts at dayrates over $500,000. Two other deepwater rigs were contracted, one in the Gulf of Mexico by Shell for $535,000 and one in West Africa for $630,000. The company also saw new and renewed contracts on four midwater floaters at over $370,000 each, and six jackups for between $120,000 and $225,000 each.
Transocean earns money by contracting with oil companies, at a daily rate, for the use of its equipment and employees. The company operates in both the exploration and production fields. Its most significant customers are Shell, Chevron, and BP, with respective shares of Transocean's income at 14%, 11%, and 11% in 2006[12]. As of August 2007, the pre-merger company got 54% of its revenues from the major integrated oil companies, 24% from national oil companies, and 21% from independent oil companies[13]. Because the company has relatively few customers, the loss of any significant contracts would have strong, negative effects on Transocean's long-term revenue stream.
| 2007 | 2008 | 1Q 2009 | 2Q 2009 | |
|---|---|---|---|---|
| Average Dayrate | $211,900 | $240,300 | $256,500 | $255,900 |
| Average Capital Utilization | 90% | 90% | 91% | 84% |
Transocean - GlobalSantaFe Merger
The 2007 merger made Transocean the worlds largest offshore drilling contractor by market cap, and the largest in the world by fleet size, with a drill rig industry market share of 20%[17]. The new Transocean fleet is more than twice the size of the next largest competitor, giving the company a powerful hand in the industry. It doesn't hurt that Transocean is also known for its quality of equipment and procedure.
Trends and Forces
As an oilfield services company, Transocean's fate is intimately connected to the fate of the oil industry as a whole.
Transocean's Deepwater Services Depend on High Oil Prices
Oil prices soared over $100/barrel in early 2008. 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 new trend in the oil industry is deepwater drilling - with shallower wells yielding less, oil and gas companies were (and still are) paying big bucks to oilfield services companies who can drill where they couldn't drill before. In the third quarter of 08 revenues were still strong, nearly that of last year.[18] Unfortunately, as oil and gas companies adjust to oil prices well below $50/barrel, demand for deepwater rigs will slow. Transocean has 48[19], with 8 ultra-deepwater rigs in construction[20]. Even as day-rates drop, more and more of its deepwater rigs will sit idle. The cause for falling oil prices is, of course, the global economic downturn. Countries that once fueled rapid demand growth for petroleum, like China, are now slowing down.
Worldwide Lags in Rig Production Will Drive Dayrates Up
Worldwide, 93% of jackups, 97% of semi-submersibles, and 100% of drillships are being contracted, with few new offshore rigs coming online in 2008[21]. This makes significant offshore equipment growth in 2008 relatively unlikely - and will probably drive up oilfield services rates significantly over the next year. Transocean has the largest fleet in the industry increasing its exposure to the market; until 2010, only 15 rigs will be available for leasing, and the company owns seven of them.[22]. Furthermore, with eight deepwater rigs in production, the company will be ready to compete at around the same time other firms start putting out new rigs.
Transocean Is Staying in the Water
Because Transocean is investing so much in its deepwater future (with 8 ultra-deepwater units in production in 2008)[23], 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 - but the company, by staying in the water, will miss out on potential windfalls, as the region is currently a hotbed of drilling activity. 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. By operating only in one expensive oilfield sector, Transocean is hedging itself against a drop in the price level. An added benefit for Transocean lies in the fact that most current deepwater sites are in relatively stable zones, like the Gulf of Mexico or 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 attacked.
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[24], 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[25], 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.[26]
- 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.
| Transocean[27] | Noble[28] | Diamond Offshore Drilling[29] | Rowan Companies[30] | ENSCO International[31] | |
|---|---|---|---|---|---|
| Average Day Rate (thousands) | $240 | $164 | N/A | $163 | $155 |
| Average Fleet Utilization | 90% | 88% | 91% | 95% | 96% |
| Average Number of Offshore Rigs | 136 | 62 | 45 | 29 | 52 |
Notes
- ↑ RIG 2Q 10Q 2009 Pg. 23
- ↑ Transocean 2008 Annual Report Part I Pg. 5
- ↑ RIG 2Q 10Q 2009 Pg. 24
- ↑ RIG 2Q 10Q 2009 Pg. 25
- ↑ Market Report -- In Play (RIG), MSN.com, July 20, 2009
- ↑ Transocean LTD 1Q 2009 Earnings Call Transcript, May 6 2009
- ↑ Transocean LTD 2008 10K Part II Pg. 33
- ↑ MarketWatch.com: "Transocean's net income tops $1 billion"
- ↑ MarketWatch.com: "Transocean's net income tops $1 billion"
- ↑ 10.0 10.1 10.2 10.3 SeekingAlpha: "Transocean Inc. Q2 2008 Earnings Call Transcript"
- ↑ Transocean LTD 2008 10K
- ↑ RIG 2006 10-K, Section 1: Significant Clients, Page 11, http://sec.gov/Archives/edgar/data/1083269/000114036107004583/form10-k.htm#1
- ↑ Stifel Nicolaus Report, August 17th, 2007
- ↑ Transocean LTD 2008 10K
- ↑ RIG 2Q 10Q 2009 Pg. 25
- ↑ RIG 2Q 10Q 2009 Pg. 29
- ↑ International Herald Tribune, July 24th, 2007, http://www.iht.com/articles/2007/07/24/business/oil.php
- ↑ 2008 10-Q RIG, Item 1, Page 1
- ↑ International Herald Tribune, July 24th, 2007, http://www.iht.com/articles/2007/07/24/business/oil.php
- ↑ Oppenheimer Report, November 29th, 2007
- ↑ http://seekingalpha.com/article/60730-schlumberger-q4-2007-earnings-call-transcript?page=3
- ↑ SeekingAlpha: "Transocean: Drilling For Profits"
- ↑ Oppenheimer Report, November 29th, 2007
- ↑ Reuters, Noble Corp NE, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=NE
- ↑ Diamond Offshore Drilling Inc DO, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=DO
- ↑ RDC 2007 10-K
- ↑ RIG 2008 10-K
- ↑ NE 2008 10-Q
- ↑ Diamond Offshore Drilling 2008 10-k
- ↑ RDC 2008 10-K
- ↑ ESV 2008 10-K
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