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Contest Submission Update: Transocean

November 11, 2012 | About:
Chandan Dubey

Chandan Dubey

97 followers
Approximately a year ago, I submitted a value idea “Transocean: A Driller with Significant Margin of Safety.” At the time the article was published (Oct. 24, 2011) the stock was trading at $54.43 a piece. The following dividend were paid:

X-DividendRecord DatePayment DatePayment
11/22/201111/25/201112/21/2011$0.79
2/22/20122/24/20123/21/2012$0.79


I myself am long 40 shares of Transocean (RIG) at an average price of $52 each for almost 16 months now.

Transocean saw significant loss in revenue after the Macondo spill on April 2010. The situation was made worse by the ongoing economic crisis around the world.

Year200920102011, 9 month2012, 9 month
Revenue ($m)11,5569,5765,3966,498
EPS9.842.991.28-1.9
Shares321320320354


The negative EPS in 2012 is due to impairment loss. The company sold its shallow water drilling unit for a net charge of $878 million and suffered a net loss of $381 million or $1.06 for the last quarter. If we add the non-recurring item then the profit for the quarter was $1.37 per share.

The going out of the shallow drilling business makes Transocean a pure deepwater play. Transocean was and is tied hand and foot to the deepwater drilling business.

Another heartening thing to see was that the utilization rate has climbed to 81% for “floaters.” This is the highest since the spill.

In another development, Chevron (CVX) and Transocean (RIG) got into another oil spill controversy in Brazil. The government sued them for $11 billion and put an injunction on Transocean which shut down its work in the country. This was largely seen as an overreaction as the spill was only 3000 barrels of oil (compared to 5 million barrels in the BP spill) and there was virtually no impact at the coast line. Thankfully, after nearly a year, the injunction was lifted last month and only the frade field where the leak happened remains closed for Transocean. The situation is a bit worrying in Brazil. The way Brazilian government handled the issue was quite panicky. They stopped Transocean and Chevron managers from leaving the country. They also slapped criminal charges on the management which was unprecedented.

On a positive note, Transocean is gaining a lot of business these days. From the third quarter report:

"New contracts associated with continuing operations totaling $10.2 billion were secured in the

Fleet Status Report periods July 18, 2012 through October 17, 2012. Backlog from continuing

operations was $29.7 billion at October 17th, a net increase of $8.3 billion."


Transocean was also awarded 10 year contracts for construction and operation of four new ultra-deepwater drillships by Shell (RDS-A, RDS-B). This will add an estimated $7.6 billion in revenue for Transocean. Transocean expects to spend $3 billion on four new rigs which will be built in South Korea. The contract is expected to start in mid-2015.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.6/5 (10 votes)

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