Deepwater Asgard

Transocean (RIG) has just provided its new fleet status report, which is especially interesting to evaluate following Diamond Offshore’s (DO) decision to skip the interest payment on its bonds and start restructuring preparations. Following contract terminations that we have seen in the Noble Corp. (NE) and Borr Drilling (BORR) fleet status reports, the key intrigue was how much damage will be dealt to Transocean’s contract backlog. Here’s the news:

  1. Drillship Deepwater Asgard, which works for Beacon Offshore in the U.S. Gulf of Mexico, will work and additional 41 days after the customer exercised an option. As per the fleet status report, the rig’s dayrate is $240,000. Deepwater Asgard is expected to work until November 2020.
  2. Drillship Discoverer India’s contract got terminated. The rig was working for Burullus in Egypt. Originally, Discoverer India was expected to work until August 2020 at a dayrate of $170,000.
  3. Harsh-environment semi-sub Henry Goodrich was stacked in March 2020.
  4. Semi-sub Transocean 712 (1983) was stacked in April 2020. For some reason, Transocean did not indicate this change in the preface to the fleet status report, but the details could be found in the footnotes. Here’s the company’s comment: “The customer, Chrysaor, purchased assets, including the drilling contract for the Transocean 712, from our previous customer ConocoPhillips UK. The new customer will replace the Transocean 712 as the contracted rig with either the Paul B. Loyd, Jr. or the Transocean Leader, with operations commencing with the substituted rig upon completion of its prior contractual commitments”. Paul B. Loyd has a contract with Chrysaor until July 2021, while Transocean Leader is on contract with Premier Oil until June 2020.
  5. Semi-sub Sedco 714 (1983) disappeared from the fleet status report. The most recent company presentation dated February 26 indicated that Transocean had 47 floaters. This means that Sedco 714 was still in the fleet, just like at the time of the release of February fleet status report. Latest rig sales shown by Bassoe Offshore do not indicate that the rig was already sold for scrap. My opinion is that this old rig got scrapped.
  6. Semi-sub Sedco 711 (1982) disappeared from the fleet status report. The same logic applies here – the rig headed to the scrapyard.
  7. Semi-sub Polar Pioneer (1985) disappeared from the fleet status report.
  8. Semi-sub Songa Dee (1984) disappeared from the fleet status report.
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Apparently, the company decided to scrap four old rigs that were still present in its fleet. I expect that Transocean 712 will soon follow their route.

At this point, Transocean has a number of cold-stacked modern drillships: Ocean Rig Apollo (stacked May 2016), Deepwater Athena (stacked March 2017), Deepwater Mylos (stacked September 2016), Deepwater Olympia (stacked April 2016), Deepwater Champion (stacked February 2016), Discoverer Luanda (stacked February 2018), Discoverer Americas (stacked April 2016), Discoverer Clear Leader (stacked June 2019) and a stacked semi-sub GSF Development Driller II (stacked January 2016).

Previously, I expected that some of the rigs acquired in the ill-fated Ocean Rig purchases will make it back to the market. I change my opinion due to the huge, long-lasting blow to the offshore industry dealt by the coronavirus crisis – I now expect that ALL of the above-mentioned rigs will end in the scrapyard. Here’s why.

We are at the beginning of the crisis – many rigs will lose their jobs, and dayrates will go down once again. The industry has not recovered from the previous crisis which started back in 2014 (!), and the dayrates have not reached the level needed to reactivate these rigs. So, the industry will have to go through a process of dayrate downside, followed by dayrate stabilization and then dayrate upside. It’s hard to say how much time the process will take, but it will surely take years. This means that we are looking at a possibility of reactivating ships that have been stacked for 7-8 years – costs would rise even more, especially if we keep in mind that safety and environmental standards keep rising year after year. Put simply, these rigs have almost no chance of ever working again.

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Transocean has avoided mass contract terminations, as it has many long-term contracts. However, I have huge doubt that this backlog will help the company avoid restructuring in the current market situation, especially given the fact that all its major peers have de facto lined up for the restructuring exercise. The stock is for traders and should be avoided by investors, since the risk of losing principal is overwhelming due to the industry situation and the company’s huge debt load.

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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 may trade any of the above-mentioned stocks.