Transocean – The SemiSub Leiv Eiriksson

Investment Thesis

Transocean (RIG) has been my first and only choice amongst the offshore drillers group, and the reason is quite manifest. Despite a stressful environment that does seem to get better, despite what the company is asserting for the past year or so, Transocean is the most likely survivor in this drillers’ group that may eventually withstand its debt load shock and remain as it is, evading a harsh restructuring.

Transocean owns a record backlog estimated at ~$10.4 billion as of January 2020. Besides, the company shows numerous options that could add many more billions after the acquisition of Songa Offshore and, more recently, Ocean Rig UDW on a much smaller scale. I have considered as a definitive mistake because of the lack of backlog attached to the merger.

The offshore drilling industry has underperformed the oil industry, and I still have a hard time to imagine what could change this situation even two or three years ahead?

We have probably reached a “rock bottom” in terms of daily rates and contracting activities in the floaters’ segment. However, it is still debatable with the extension of the recent contracts agreed well below $200K/d that I will talk about later.

It is unquestionably not an invitation to turn mildly bullish or support a long-term investment in the offshore drilling sector. RIG had been my most significant long-term investment in the offshore drilling sector up until about two years, and I have been reducing my position significantly since then.

Instead, my investment thesis is still promoting a very cautious tiny long-term investment in RIG, that I was recommending at or below $4 in my preceding article last October:

Finally, the stock is now close to an attractive valuation again and assuming oil prices remaining at appropriate levels. RIG is offering a chance to profit especially below ~$4.15.

And most importantly, adopt a very active short-term trading that presents an excellent opportunity for a quick profit, especially in this sad and unsettled environment.

Transocean has been performing better than its peers (e.g., Diamond Offshore (DO) and Valaris Plc (VAL)) or compared to the VanEck Vectors Oil Services ETF (OIH). RIG is the only stock that has outperformed OIH since January 2018, while DO and VAL scored very poorly, with VAL down 74%.

ChartData by YCharts

Complete Fleet Status as of January 8, 2019

The company’s fleet status was released on January 9, 2019. It was not a fleet status per se this time but more a new update in which Transocean indicated that it added $352.9 million in additional contract backlog.

Below, there are the fleet status details after applying the recent changes, the best I could. However, it is not perfect, and I have to caution readers that it is only my estimate.

1. Rigs Under Construction

#Ultra-deepwater Drillships RIG K feet Delivery Contract End

Day Rate

K $

Location
1 JSPL Ultra-deep Espadon TBN 1 (“1”) 12/40 2Q’20 Available
2

Deepwater Titan

(“1”)

12/40 4Q’20+ 4Q21-4Q26 455

[Chevron (CVX)]

US GoM

(“1”): The company agreed with SembCorp Marine’s subsidiary, Jurong Shipyard, to enhance the two newbuild drillships by increasing the hook load capacity to three million pounds. With the upgrade, the company has further delayed the delivery dates on each rig. The drillships are expected to be delivered in the second and fourth quarters of 2020.

(Source: Transocean)

2. High-Specification Floaters: Ultra-Deepwater

1

Deepwater Poseidon

2018

Ship

2/28

477

[Shell (RDS.A, RDS.B)]

US GoM

2

Deepwater Pontus

2017

Ship

10/27

477

[Shell]

US GoM

3

Deepwater Conqueror

2016

Ship 12/21 582

[Chevron]

US GOM

4

Deepwater Proteus

2016

Ship

5/26

473

[Shell]

US GoM

5

Deepwater Thalassa

2015

Ship

2/26

474

[Shell]

US GoM

6

Deepwater Asgard

2014

Ship

12/19-07/20

7/20-9/20

220

240

[Beacon]

US GoM

7

Deepwater Invictus

2014

Ship

1/20 – 3/20

3/20 – 4/20

4/20-4/21

N/D

N/D

155

[BHP (BHP)]

US GoM/Trinidad/GoM

2x1Y opt.

8

Discoverer Inspiration

2010

Ship

3/20

3/20-7/20

564

210

[Chevron/Talos (NYSE:TALO)]

US GOM

9

Discoverer India

2010

Ship

4/20

170

[Burullus]

Egypt

10

Dhirubhai DW KG1

2009

Ship

11/20

127

[Reliance]

India

11

Dhirubhai DW KG2

2010

Ship

6/20

6/20-12/20

260

250

[CNOOC-Chevron/Wooside]

China/Australia/Myanmar

12

Petrobras 10000

2009

Ship

2/20

3/20-2/21

3/21-9/21

298

307

316

[Petrobras (PBR)]

Brazil

13

Deepwater Nautilus

2000

SemiSub

1/20 -2/20

2/20-8/20

175

140

[Shell/Petronas]

Malaysia/Brunei

14

GSF Development Driller I

2005

Ship

3/20

3/20 -10/20

209

217

[Chevron]

Australia

4x2m opt.

15

GSF Development Driller III

2009

Ship

2/20

2/20-2/21

192

250

[Exxon Mobil (NYSE:XOM)/Undisclosed]

Equatorial Guinea/Trinidad

3 x 6m options

16

Ocean Rig Skyros

2013

ship

9/21

573

[Total (TOT)]

Angola

Three options

17

Ocean Rig Corcovado

2011

ship

5/21

195

[Petrobras]

Brazil

18

Ocean Rig Mykonos

2011

ship

5/21

215

[Petrobras]

Brazil

3. High-Specification Floaters: Deepwater

None active.

4. High-Specification Semi-Submersibles: Harsh-Environment

High-specification floaters: Harsh-environment (7)

1,500′-10,000’/25,000′-30,000′

Contract

End

Current

Day Rate

K $

Location
1

Transocean Leader

1987-1997 – SemiSub

4 G

3/20-6/20

N/D

[Hurricane Energy (OTCPK:HRCXF)/Premier Oil (OTCPK:PMOIF)]

UK NS

1-month option

2

Paul B. Loyd, JR

1990 – SemiSub

2/20 – 3/20

3/20 – 9/20

160

205

[Hurrican Energy]

UK NS

3

Transocean Arctic

1986 – SemiSub

5/20

N/D

[DEA Norge]

Norway

3m opt.

4

Transocean Spitsbergen

2010 – SemiSub

10/19 – 6/22

~250

[Equinor (NYSE:EQNR)]

NNS

6x1m opt.

5

Transocean Barents

2009 – SemiSub

9/19

262

[Suncor Energy (SU)]

Canada

6

Songa Enabler

2016 – SemiSub

3/24

438-425

[Statoil]

Norway NS

7

Songa Encourage

2016 – SemiSub

11/23

434 – 421

[Statoil]

Norway NS

8

Songa Endurance

2015 – SemiSub

6/23

492-478

[Statoil]

Norway NS

9

Songa Equinox

2015 – SemiSub

12/22

492-478

[Statoil]

Norway NS

10

Leiv Eiriksson

2001 – SemiSub

1/20-5/20

235

[ConocoPhillips (NYSE:COP)]

Norway

11

Transocean Norge (ex-West Rigel)

Transocean owns 33%

5/20

291

[Equinor]

Norway

5. Midwater Floaters

Midwater floater: (21)

1,000′-3,600’/25,000′

Ship or Semi

Contract

Start/End

Current

Day Rate

K $

Location
1

Transocean 712

1983

Semi

1/21

134.5

[ConocoPhillips]

UK NS

6 – Stacked and Idle Rigs

Cold-stacked rigs Name Year Built

Contract End

Location
1 Sedco 714 1997 11/15 North Sea
2 Polar Pioneer 1985 12/15 Canada
3 Sedco 711 1982 1/16 North Sea
4 GSF Development Driller II 2005 1/16 North Sea
5 Discoverer Champion 2011 2/16 GoM
6 Discoverer Americas 2009 4/16 North Sea
7 Songa Dee 1984 9/16 Norway
8 Discoverer Luanda 2010 2/18
9 Ocean Rig Athena 2014 3/17 Spain
10 Ocean Rig Mylos 2013 9/16 Spain
11 Ocean Rig Olympia 2011 4/16 Spain
12 Ocean Rig Apollo 2015 5/16
13 Discoverer Clear Leader 2009 6/19
Rigs Idles
1

Deepwater Orion (Ex-Ocean Rig Poseidon)

2011

2011 10/19
2

Henry Goodrich

1985-2007 – SemiSub

However, the rig is still considered as operational as I am writing here.

Note: The Semi-submersible Henry Goodrich has officially ended its contract at the end of 2019. However, the rig is still classified as operational by InfieldRigs (see link above). I am not aware of any contract extension, and I suppose the rig is finishing drilling now. To check the last October fleet status, click here.

Fleet Analysis Snapshot

Rig fleet per category (minus recently scrapped rigs or held for sale) – No Jack-ups:

Total UDW

Deepwater

semi-subs

HE Deepwater Semi-subs. Midwaters
Number of Rig operating 30 18 0 11 1
Cold-stacked/idle 15 8 2 3 2
New build rigs – no contract 1 1 0 0 0
New build rigs with a firm contract 1 1 0 0 0
Total 47 28 2 14 3

Fleet status/revenues in graphs

The backlog distribution per quarter stretches until 2028 due to long-term firm contracts signed with Shell and Ex-Statoil now Equinor through the acquisition of Songa Offshore and Ocean Rig.

I have estimated the backlog at $2,984 million for 2020 (please see graphs below).

The total backlog is estimated at ~$10.4 billion as of January 8, 2019. The graph below shows the yearly distribution.

I have estimated that Shell activity represents 44.3% of the total backlog of the company ($4.9 billion).

Note: Those contracts are firm, and if terminated for convenience, Transocean will be compensated by an amount above 80% of the total backlog remaining, making them ultra-safe.

The graph below is showing the yearly impact of Shell’s backlog on the total RIG backlog.

The five drillships involved were Poseidon, Deepwater Pontus, Deepwater Proteus, Deepwater Thalassa, and Deepwater Nautilus.

Transocean is essentially an ultra-deepwater business, with over 71.8% of the total backlog attached to the Ultra-Deepwater portion. However, with the acquisition of Songa Offshore, the semisub segment Harsh-Environment (mainly in the North Sea) increased to 27.6% of the total backlog as of October 17, 2019.

Conclusion and Technical Analysis

This new update is still quite “weak,” and it is difficult to see any substantial positive in the report. Yes, it is not catastrophic, but this update is not solving anything.

The backlog addition since October totaled $352.9 million, which is still insufficient to prevent the contract backlog from continuing its concerning slide.

However, I see some progress toward stabilization or a rock-bottom building. Unfortunately, I do not see any encouraging signs towards a bottoming OUT, and it is concerning.

Daily rates are hovering in the low to mid $200s with a one-year contract extension in the US GoM at a dismal $155k/d for the deepwater Invictus working for BHP or even less for the Deepwater Nautilus in Malaysia with Petronas at a whopping $140k/d (contract extension).

It is a sharp contrast from Transocean’s statement, indicating that the offshore drilling market continues to improve, and the company is witnessing an uptick in contract opportunities for its ultra-deepwater and harsh environment drilling services. I read that same comment probably a year ago, but I do not see its effects on the backlog yet.

Transocean President and Chief Executive Officer Jeremy Thigpen said.

Customer demand for the highest specification ultra-deepwater floaters now equals or exceeds the number of marketable rigs currently available in many areas,[…] As a result, new contracts more consistently reflect materially increased dayrates, which will generate significantly improved cash flow

Thus, let’s hope for the best and be prepared for the worst (trading).

Also, a few words here about the debt situation, which is one sensible issue. On January 8, 2020, the company also announced that it has:

[P]riced its previously-announced offering of U.S. $750 million aggregate principal amount of senior unsecured notes due 2027 (the “Notes”)… The Notes will be fully and unconditionally guaranteed by Transocean Ltd. and certain of Transocean Inc.’s subsidiaries.

The Notes will bear interest at the rate of 8.0% per annum. The offering is expected to close on or about January 17, 2020, subject to customary closing conditions. Transocean intends to use the net proceeds from this offering to refinance, repurchase and/or redeem certain of its existing indebtedness in one or more transactions, and/or for general corporate purposes.

Net debt (Gross debt minus total Cash) is now $7.48 billion.

Net debt is about $7.48 billion as of September 30, 2019, which is a 6.6% increase from $7.02 billion the same quarter a year ago, due to the Songa Offshore and Ocean Rig acquisitions.

The debt is too high, and reducing the net debt should be the company’s priority now. However, it is a challenging task, and I am not optimistic about this matter owing to the contracting situation.

Moody’s comment about this new issuance was interesting:

Transocean benefits from its superior revenue backlog of approximately $11 billion, and the company’s measures to maintain high levels of revenue efficiency, reduce operating costs, address debt maturities and enhance operational utilization of its active rigs. Although the company has managed to improve average fleet utilization through 2019, maintaining it well above 80% year-to-date, a meaningful portion of the utilization comes from relatively shorter-term contracts. For the company to improve its credit profile, it needs to capitalize on the apparent supply/demand rationalization in the deepwater and ultra-deepwater segment to sign new long-term contracts at higher than prevailing dayrates… The company’s very good liquidity and the absence of significant near-term maturities mitigate default risk notwithstanding high financial leverage. However, for Transocean’s credit profile to improve, the early signs of improving fundamentals in the offshore sector need to sustain.

Technical Analysis

RIG is forming an ascending channel indicated above by line support at $4.85 and line resistance at $7.20. What is not stated in the chart is the intermediate support at around $5.90 and eventually again below $5.00.

The trading strategy is to sell about 30-40% around $7.20 or higher and buy back at first support. An ascending channel pattern is generally bullish because it marks a succession of “higher highs” which eventually result in a breakout of the resistance.

It is possible only if oil turns very bullish, and it is possible depending on what the Iranian will do about the assassination of their General by the USA? In the optimistic case, RIG could eventually retest $7.80 and later $9. Conversely, the bearish case would result in a breakout of the line support with a retest of $3.80-$4.00.

What I said above is only a “trading blueprint” that should be adjusted regularly, depending on the news.

Author’s note: If you find value in this article and would like to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks!

Disclosure: I am/we are long RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am trading short term RIG for years and keep a limited long term position.

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2020-01-09