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Transocean (RIG)Stock (Energy Industry, Oil & Gas Drilling & Exploration Industry)
 Transocean's big bet is on oil prices staying high, as 48 of the company's rigs are designed for high-cost, high-risk deepwater operations; as long as oil prices stay up, the company's dayrates and utilization rates will stay high (as will revenues and net income), but a downturn in price would leave the company mired in unused capital and shrinking margins. Most of Transocean's deepwater drilling is occurring in the Gulf of Mexico, with less of its efforts being spent on expanding in other parts of the world. The company is staying out of the fast-growing Middle East sector - the technology required in the region is expensive, but if oil prices continue to rise Transocean will regret this conservative choice.
[edit] Business FinancialsTransocean's revenues have grown at an average of 17% in the past three years[2], even before the GlobalSantaFe merger. Its fleet is now twice the size of its nearest competitor.[3] 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. In the second quarter of 2008, Transocean saw dayrates rise 4% from the first quarter[4], while net income approximately doubled year-on-year, to $1.11 billion.[5] Revenues were $3.102 billion[6], down from $3.110 billion in 1Q08.[6] Backlog grew by $7 billion, to a record $41 billion.[6] The company increased its number of rigs in construction to 10 ultra-deepwater units.[6]
Source: 2007 Annual Report[7] 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[8]. 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[9]. 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. 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. Transocean is anticipating demand for its deepwater ships to increase in Brazil in coming years. 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.
Source: 2007 Annual Report[10] Transocean's rising day-rates and increasing capital utilization were indicative of increased demand for drilling services. As worldwide energy demand has increased even more in 2008, and is expected to keep growing in the future, Transocean's day-rates are expected to increase at an even greater rate in the near future. [edit] Transocean - GlobalSantaFe MergerThe 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%[11]. 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. [edit] Trends and ForcesAs an oilfield services company, Transocean's fate is intimately connected to the fate of the oil industry as a whole. [edit] Transocean's Deepwater Services Depend on High Oil PricesOil prices soared over $100/barrel in early 2008. As oil prices go up (and stay up), oil companies like Shell, Chevron, and BP all have greater incentive to increase production; thus, price shifts have driven 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, and potential income through the roof thanks to high prices, oil and gas companies are paying big bucks to oilfield services companies who can drill where they couldn't drill before. There are a limited number of deepwater drills in the world, but Transocean has 48[12], with 8 ultra-deepwater rigs in construction[13]. Furthermore, Transocean's deepwater technology is patented by the company. This means that when other oilfield services companies build new deepwater rigs or rig upgrades that use the technology, they must pay a percentage to Transocean.[14] As long as oil prices are high, demand for deepwater drilling will be high; if prices fall, then deepwater technology (which is much more expensive than traditional drilling technology) will probably lose its appeal, and 48 of Transocean's rigs will sit idle, even as day-rates drop. [edit] Worldwide Lags in Rig Production Will Drive Dayrates UpWorldwide, 93% of jackups, 97% of semi-submersibles, and 100% of drillships are being contracted, with few new offshore rigs coming online in 2008[15]. 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.[16]. 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. [edit] Transocean Is Staying in the WaterBecause Transocean is investing so much in its deepwater future (with 8 ultra-deepwater units in production in 2008)[17]), 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. [edit] Red Sky at Morning, Transocean Investors Take WarningWith 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. [edit] The Transocean-GlobalSantaFe Merger Might Trigger Industry ConsolidationWhen 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. [edit] CompetitionThough 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.
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.
[edit] Notes
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