Transocean Bubbles To $55 On Ultra-Deepwater Demand
Transocean has had a relatively upbeat year so far. The firm made some significant progress in resolving its legal woes and things have been looking up on the operational front as well. The healthy demand for deepwater and ultra-deepwater drilling has resulted in better utilization rates and a strong contract backlog.
We have a price estimate of around for Transocean, which is a 10-5% premium to its current market price. Here are some key factors that we believe are driving the firm’s valuation.
Increasing Focus On Ultra-Deepwater
As oil becomes increasingly difficult to find onshore and in shallow waters, oil and gas companies are moving to explore in deeper waters. Last year, around 28% of new offshore discoveries (in terms of volumes) came from deepwater plays while around 49% came from ultra-deepwater plays. Ultra-deepwater has emerged as the most important segment of the offshore drilling market since day rates and utilization rates are among the highest for these rigs. Transocean has been realigning its asset mix to focus on ultra-deepwater, and is currently the largest player in this space with around 29 ultra-deepwater rigs. There are around 120 ultra-deepwater rigs worldwide. Last year, Transocean divested its low-specification jack-up rigs and placed an order for four newbuild ultra-deepwater drillships that will be contracted to Royal Dutch Shell. Transocean’s ultra-deepwater rigs have a utilization rate of around 94% and dayrates are typically above 0,000.
In January, Transocean reached an .4 billion settlement with the U.S. Department of Justice to settle civil and criminal charges relating to the Macondo well oil spill in the U.S. Gulf Of Mexico. The firm is also making progress in resolving the litigation relating to the Frade oil spill off the coast of Brazil and the criminal cases against its employees have already been dropped.
Earlier this year, the firm came under attack from activist investor Carl Icahn who brought about a proxy battle, pushing for an increase in the company’s dividend and a shake-up of the company’s board of directors. However, during the firm’s annual general meeting last month, shareholders voted against Icahn’s proposal for a higher dividend (annual payout of around .4 billion) which would have potentially strained the firm’s liquidity and financial position and instead chose the board’s backed payout of around 0 million per year. Resolving these issues clears some of the clouds hovering over the company and allows it to focus on the growing offshore market.
U.S. Gulf Of Mexico And Africa Can Drive Growth
The U.S. Gulf of Mexico remains Transocean’s largest market, accounting for over 20% of its revenues. Around 14 of its 27 ultra-deepwater rigs are contracted in the region. The Gulf also looks promising from a growth standpoint as the U.S. government has been auctioning fresh drilling leases under President Barack Obama’s five-year leasing plan, and this could stimulate demand for additional offshore rigs in the region.
Transocean has a wide geographic presence and looks well-positioned to gain from growing offshore activity in emerging offshore markets as well. Africa looks quite promising for Transocean given that the total number of offshore rigs in the region has nearly doubled over the last four years. The firm has around 15 rigs under contract in West African nations of Nigeria and Angola, and could see more demand for deepwater exploration in East Africa as well, following the large gas finds in the offshore Area 1 of Mozambique.
The firm is scheduled to begin a new contract with Anadarko this month for an ultra-deepwater rig at a rate of around 0,000. Australia is emerging as an important market for offshore drilling as well. The country recently awarded 13 new permits for exploration off the coast of Western Australia in the first round of auction. Transocean recently won a contract with Woodside Petroleum in Australia for an ultra-deepwater rig that will enter into service next year.
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