Analysis: Transocean Still Strong and Growing

Transocean is going through a difficult time in their organization's history with the loss of life being paramount to their pain.  However, it is important to remember that as a business, Transocean is one of the strongest.

In 2007 Transocean became the world's largest offshore drilling contractor when it merged with GlobalSantaFe. Its rigs work in all types of drilling markets including the US Gulf of Mexico, eastern Canada, Brazil, the UK and Norwegian sectors of the North Sea, West Africa, Australia/Asia, the Middle East, India, and the Mediterranean.

Transocean has a long history in offshore drilling dating back to the industry's first jackup drilling rig in 1954. Today the company has 65 jackups in its fleet, 39 of which are contracted this week. All of Transocean's jackups are cantilevered rigs capable of drilling in maximum water depths of 200 ft to 400 ft.

Transocean's contracted jackups have an average dayrate in the mid-$120s, compared the worldwide jackup dayrate in the mid-$110s. The Transocean jackup with the highest dayrate is the GSF Monarch, which is contracted in the high $190s. The GSF Monarch is rated for up to 350 ft of water and can drill down to 30,000 ft. The rig is currently drilling off the Netherlands for Shell through July 2010.

The drilling contractor also has a total of 51 semisubmersibles, 41 of which are under contract this week. Looking at the contracted fleet, 18 semisubmersibles are rated for over 4,000 ft of water and 23 are under the 4,000 ft water rating. The semisubmersible fleet also includes 18 harsh environment moored semisubmersibles.

Transocean's contracted semisubmersibles are commanding an average dayrate in the mid-$360s, which is in line with the worldwide semisubmersible average. The Transocean semisubmersible with the highest dayrate is the GSF Development Driller II at a dayrate in the low-$580s. The GSF Development Driller II is under contract with BP. The semisubmersible started drilling a second relief well on May 16 at the Macondo Prospect, which is the site of the oil spill in the GOM. Its sister ship, the GSF Development Driller III spud the first relief well about two weeks prior. The relief well is estimated to cost $100 million. The relief wells, in 5,000 ft of water, will be drilled to 16,000 ft below the seabed to seal the leak. The second well is intended to serve as a backup should BP encounter problems reaching the target with the first. BP anticipates that it will take approximately three months to complete each well from the commencement of drilling.

Transocean lost its Deepwater Horizon semisubmersible in the blowout. The rig was a dynamically-positioned semisubmersible rated to work in water depths up to 10,000 ft and had a rated drilling depth capacity of 30,000 ft. The rig was under long-term contract to BP through September 2013 at a dayrate in the low $500s. The Deepwater Horizon was built in Ulsan, South Korea by Hyundai Heavy Industries at a cost of approximately $365 million and entered service in 2001.

Deepwater Horizon
Deepwater Horizon Source:

Transocean owns 23 drillships, all of which are contracted. The drillships are capable of drilling from 7,000 ft down to 12,000 ft and are commanding an average dayrate in the mid-$440s, compared to the worldwide average in the high-$380s.

The Transocean drillship commanding the highest dayrate is the Discoverer Enterprise with a dayrate in the mid-$520s, BP is using the rig to assist with relief efforts at the Macondo well. BP has the rig under contract through March 2011.

Newbuild Drillships Add to Premium Fleet

Transocean has recently begun rolling out five new enhanced Enterprise-class drillships. The Discoverer Inspiration left the Daewoo Shipyard in South Korea in Q4 2009. It is rated to 12,000 ft of water and can drill down to 40,000 ft. Its first contract started March 11, 2010 for Chevron in the GOM. Chevron has contracted the drillship for a rate in the $470s through March 2015.

Discoverer Inspiration
Discoverer Inspiration Rig Data: Rigzone

The Dhirubhai Deepwater KG2 was completed in Q1 2010. The drillship is rated to 10,000 ft of water and is capable of drilling down to 35,000 ft. Its first contract commenced in March for Reliance Industries off India at a rate in the low-$510s.

Dhirubhai Deepwater KG2
Dhirubhai Deepwater KG2 Rig Data: Rigzone

The Discoverer Luanda is currently undergoing sea trials. The drillship completed quayside construction at the DSME shipyard in South Korea in Q1 2010. The vessel is designed to work in up to 7,500 ft of water and drill down to 40,000 ft. It is contracted to work for BP off Angola for seven years starting in mid-July 2010 at a rate in the $430s.

Two of Transcocean's drillships are still under construction. The Discoverer India is rated for up to 10,000 ft of water. The Daewoo Shipyard in South Korea is expected to complete the rig in September 2010. Reliance Industries is expected to commence operation in November 2010. For the first six months, the operator will pay a dayrate in the $530s. In mid-May Reliance will start paying a dayrate in the $550s through November 2015. However, Reliance has an option to extend the length of the contract to either seven or 10 years up to one week after mobilization.

The Deepwater Champion drillship is also under construction at Hyundai Heavy Industries in South Korea. The rig is expected to be ready for service in September 2010. Its first contract is with ExxonMobil and commences at the end of January 2011 offshore Turkey in the Black Sea. The dayrate is expected to be in the range of $640 - $650.

Earnings Report

Transocean reported its Q1 2010 earnings in early May. The company announced a net income of $667 million, compared to $942 million in Q1 2009. Revenues were $2.602 billion, which decreased from $3.118 in Q1 2009.

As for the remainder of the year, it will be interesting to see how the loss of the Deepwater Horizon affects the company's numbers. Based on Transocean's most recent contract status report, it is estimated that the company will lose approximately $613 million from April 22, 2010 to September 2013 (the contract termination date). EBITDA and cash flow implications are estimated at approximately $435 million over the time remaining on the rig's contract, which works out to be approximately $33 million per quarter in 2010.

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