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Stay Away from Transocean

May 02, 2014 | About:



Transocean (RIG) is the world's largest offshore drilling contractor, with leading market share in the deepwater and harsh environment drilling segments. The company owns and operates a fleet of high-specification floaters, midwater floaters and high-specification jackups. Considering the present scenario in the supply of rigs, the earnings of Transocean might see a decline in the short term due to the ongoing oversupply of rigs. The demand for rigs is expected to remain stagnant during 2014, and this presents a big challenge for Transocean.

A Difficult Time Ahead

Transocean, as a result of slowing rig demand, has reported a weak outlook for the future. The company is expecting continued lower rig utilization in 2014. Transocean is having 42 contract renewals in 2014. With low rig demand, the company is worried about fulfilling the renewals. As a result, Transocean is worried about the risk of hurting its earnings.

Estimates by USB analyst Angie Sedita further disappoint Transocean investors as she expects the company to face lower day rates and some idle periods between contracts. In addition, she expects several of the midwater and deepwater rigs to remain idle for an extended period.

Despite these issues, Transocean surprised everyone after announcing the construction of two new ultra-deepwater rigs at the Sembcorp's Marine's Jurong shipyard in Singapore. The two drillships are expected to be delivered from the shipyard in the second quarter of 2017 and the first quarter of 2018, respectively, and will cost approximately $620 million each.

However, according to Sedita, the addition of rigs in an already over supplied market will be challenging and the outcome can be grave. However, the company can contract the rigs at viable dayrates.

A Look at the Strategies

The company’s move to open a shipyard in Singapore can be an upsetting one as traditionally, the Singapore yards have been known for their jack-up construction, and a few semisubmersibles, but not drillships. In spite of this, the company found the Jurong yard better. The factor that drove the company to go for this risky decision may be the total price and the appealing financing terms of 5% down payment and 95% upon delivery.

As rates and utilization are under pressure and seeing continued weakness, Transocean is expecting that the offshore market might slow down. There are many indicators in the market that suggest that contract demand is declining in the market. Further, adding to the negativity, Transocean cited disappearing contract opportunities for four high-caliber rigs.

Transocean has been facing customer drops as a result of prevailing stiff market conditions and over supply. The company announced that it had letters of intent (LOI) for four deepwater rigs to work in West Africa and the U.S. Gulf of Mexico, which were ultimately canceled due to the operators postponing drilling programs to 2015. This is a tough situation for Transocean.

Sedita discusses the company’s upsetting situation. The company has moved beyond equilibrium as a result of the ongoing oversupply in the market. The industry is now expecting to deliver 28 new-build UDW floaters in 2014, of which 12 remain un-contracted. At about this time last year, the industry was delivering 22 rigs, of which six were un-contracted, and each rig was under advanced negotiations for a contract.

This is not enough for Transocean as there are many floaters that are up for renewals in 2014. The company is expecting idle time and lower dayrates for them. There are about 60 floaters that have renewals due in 2014. This will be a tough situation for Transocean.

At last, having been given slowing E&P budgets, a number of the lower specification floaters which had been working steadily over the past five years will become idle either indefinitely or for extended periods between shorter term contracts.


Transocean is having a very difficult time and its shares are already down more than 13% this year. Given the weakness in the industry, Transocean's shares can decline further. Investors should stay away from this company.

Rating: 1.0/5 (2 votes)



Choonlle - 4 months ago

The stock is trading at cheap valuation. I stick to accumulate the RIG shares until recovery of sales/revenue.

Sbrncra - 4 months ago

pacd will deliver!

Paulschinider12 - 4 months ago
The spin-off comes about as part of a larger understanding between Transocean and one of its largest backers, activist investor, Carl Icahn (Trades, Portfolio), who heads the Icahn Group

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