Transocean – The SemiSub Leiv Eiriksson
Transocean (NYSE:RIG) has been my first and only choice amongst the offshore drillers group, and the reason is quite manifest, it is called “backlog.” Despite a stressful environment that has dramatically worsened to an unsustainable situation due to the coronavirus effect on the oil demand and the price war initiated by Saudi Arabia. Until now, I believed that Transocean was the most likely to survive in this drillers group, but not anymore. I may change my mind again if oil prices can quickly recover to a more acceptable level, but I doubt it will happen soon enough.
However, the recent events that I talked about above have shaken my belief that the company could survive its debt load and remain as it is, evading a harsh restructuring that seems more probable to the rest of the group. I decided to liquidate my long-term position last week and trade only the stock.
Transocean owns a record backlog of $9.6 billion as of April 16, 2020. Furthermore, 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. Below is the backlog history.
Transocean has been performing a little better than its peers (e.g., Diamond Offshore (NYSE:DO) and Valaris Plc (NYSE:VAL) and Noble Corp. (NYSE:NE)) or compared to the VanEck Vectors Oil Services ETF (NYSEARCA:OIH). However, the picture is dreadful, with a loss in market value from 87% to 97% in one year.
Complete Fleet Status as of April 16, 2020
The company’s fleet status was released on April 16, 2020. Transocean indicated that it added $10 million in additional contract backlog. The change was minimal with a contract extension and a contract termination.
- Deepwater Asgard – Customer exercised a 41-day option in the U.S. Gulf of Mexico; and
- Discoverer India – Burullus terminated its current drilling contract in Egypt and will pay a termination fee.
Fleet Status/Revenues in Graphs
The backlog distribution per quarter stretches until 2028 due to long-term firm contracts signed with Shell (NYSE:RDS.A) and Ex-Statoil, now Equinor (NYSE:EQNR) through the acquisition of Songa Offshore and Ocean Rig.
I have estimated the backlog at $2,115 million for the remaining of 2020 (please see graphs below).
The total backlog is estimated at $9.6 billion as of April 16, 2020. The graph below shows the yearly distribution.
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 quite 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.
I have estimated that Shell activity represents 49% of the total backlog of the company ($4.7 billion).
Transocean is essentially an ultra-deepwater business, with over 72.6% 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 27.1% of the total backlog as of April 16, 2020.
Fleet Analysis Snapshot
Rig fleet per category (minus recently scrapped rigs or held for sale) – No Jack-ups:
|HE Deepwater Semi-subs.||Midwaters|
|Number of Rig operating||30||18||11||1|
|New build rigs – no contract||1||1|
|New build rigs with a firm contract||1||1|
The company said:
Transocean owns or has partial ownership interests in, and operates a fleet of 41 mobile offshore drilling units consisting of 28 ultra-deepwater floaters, 12 harsh environment floaters and one midwater floater. In addition, Transocean is constructing two ultra-deepwater drillships.
Conclusion and Technical Analysis
The backlog addition since February totaled only $10 million, which is still a piece of good news, considering the terrible situation of the entire oil sector struggling right now.
Oil operators are reducing CapEx aggressively, and Transocean and the rest of the offshore drillers will likely face some tough negotiations about day rate on existing contracts and probably many terminations as well.
Daily rates were hovering in the low to mid $200s, but they will fall quickly now. It is hard to see how the offshore industry will be able to generate positive cash flow from such low day rates and eventually tackle the industry debt problem before it is “too much to handle.”
The technical analysis here is a delicate exercise, especially in this volatile environment. However, the idea is that RIG is now trading within a symmetrical wedge pattern with line resistance at $1.55 and line support around $1.02.
I recommend using this range with selling at or above $1.55 and buying slowly at or below $1.02.
However, as we have experienced with Diamond offshore today, this exercise is not without some critical risks.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 trade only RIG, and I have liquidated my long-term position.