netrashetty
Netra Shetty
Transocean is the second-largest offshore drilling contractor in the world (by market cap). In the third quarter of 2009, the company owned 136 mobile offshore drilling platforms, including 42 high-specification floaters, 26 midwater floaters, 10 high-specification jackups, and 55 standard jackups. Transocean's rigs are floating, mobile drillships that the company rents, along with the equipment and personnel needed for operations, to oil and gas companies at a daily rate. The company manufactures drilling rigs for all depths, including deepwater, and has ten ultra-deepwater vessels in production - and it has higher dayrates and a vastly larger fleet than competitors like Noble and Diamond Offshore Drilling.[1] Most of Transocean's drilling is occurring in the Far East, the U.K.., Middle East and the U.S. Gulf of Mexico, as well as parts of Africa and Asia.[2]
President Barack Obama announced on March 31, 2010, that he would open up large swaths of the Eastern Seaboard to off-shore drilling. The proposal allows companies to lease land and drill for oil and natural gas from the tip of Florida to the northern end of Delaware, as well as certain locations in the Gulf of Mexico and by Alaska. The proposed bill would still protect regions that are considered to be delicate, and all drilling would take place only after research to determine the effect on the environment. Already the bill has been met with resistance by Republicans who say it does not go far enough, and with harsh criticism from environmentalists. The additional areas in the Gulf of Mexico could hold up to 3.5 billion barrels of oil and 17 trillion cubic feet of natural gas, but the start to any such drilling would still be several years off [3]
Contents
1 Business Financials
1.1 Transocean - GlobalSantaFe Merger
2 Trends and Forces
2.1 Fire and Ensuing Oil Spill at Transocean and BP Deepwater Horizon rig illustrates potential costs of deepwater drilling offshore and has the potential of bringing forth more safety regulations
2.2 Transocean's Deepwater Services Depend on High Oil Prices
2.3 Transocean Is Staying in the Water
2.4 Red Sky at Morning, Transocean Investors Take Warning
2.5 The Transocean-GlobalSantaFe Merger Might Trigger Industry Consolidation
3 Competition
4 Notes
Business Financials
Third Quarter 2010 Summary
For the third quarter of 2010, Transocean reported contract revenue of $2.3 billion, an 18% decrease from the same quarter in 2009, while net income decreased 46% to $378 million. Despite new revenue generated by operations commenced in 2010, many factors caused the decline in drilling revenues. During the quarter, there were 42 stacked or idle rigs, compared to 29 rigs in the same period in 2009--this accounted for approximately $375 million in reduced drilling business. Additionally, the U.S. Gulf of Mexico drilling moratorium accounted for a loss of $130 million, higher out-of-service time for maintenance and repairs accounted for reduced revenue of $55 million, and approximately $40 million in revenues associated with the Deepwater Horizon contract were lost during the quarter.[4]
Second Quarter 2010 Summary
For the second quarter of 2010, contract revenue was $2.290 billion, down 12.7% from the same quarter in 2009, while net income was $720 million, down 10.9% percent from the same quarter in 2009. Despite having higher average daily revenue and $270 million revenue from newer fleets that commenced operations in 2009 and 2010, these decreases occurred because of lower utilization. Reduced drilling revenues were mainly due to $345 million attributed to 36 rigs that were stacked or idle, double the amount that were stacked or idle in the same period in 2009, and $170 million attributed to higher out-of-service time due to mobilization, maintenance, and repairs. Approximately $40 million in revenues associated with the Deepwater Horizon contract were lost during the quarter.[5]
First Quarter 2010 Summary
Despite the completion of newbuild projects and the commencement of operations at many new rigs, revenue for the first quarter of 2010 was down 26% from the same period in 2009 to $8.2 billion. Net income was also down 4% from the year earlier period to $723 million. These declines were mainly attributed to lengthier out-of-service times required for rig maintenance and continued poor market conditions. These conditions required Transocean to keep 33 rigs idle, as opposed to only 6 idle in the same period in 2009. However, due to the stacking of Midwater Floaters and Jackups fleets average daily revenue increased since they are contracted at lower dayrates as compared to High-Specification Floaters.[6]
Also impacting the first quarter, on April 20, 2010, an explosion on Transocean's enterprise-class rig Deepwater Horizon left 11 crew members presumed dead and several others injured. Although the rig was at the time under a lease to BP until September 2013, the subsequent loss of the rig resulted in an automatic termination of the leasing agreement. The rig was insured for up to $560 million, however the associated backlog amounted to $590 million and Transocean is uncertain about additional costs and insurance recoveries.[7]
Fourth Quarter 2009 Summary
For the fourth quarter of 2009 revenue was down to 2.73 billion dollars, a 16% decrease from the same period in 2009, and net income was $685 million, a 27% decrease from the previous year. Part of the decrease in net income can be explained by the $142 million that RIG had to pay the Brazilian government when an import permit for one of its rigs expired. Currently of its 65 shallow water rigs 28 are sitting idle since market conditions remain poor, but Transocean feels like the market has stabilized and that at least a few of those rigs should find work in the coming weeks.[8]
Third Quarter 2009 Summary
For the third quarter of 2009 revenue was down 2%, as compared to the second quarter of 2009, to $2.82 billion. Net income was down 33% to $710 million as compared to the same period in 2008. Revenues were adversely impacted by charges from litigation matters and decreases in rig activity. Negative impacts were partially offset by the commencement of two new drillships and improvement in dayrates.[1]
Second Quarter 2009 Summary
At the end of the second quarter of 2009 operating revenue was down 7% to $2.88 billion and net income was down 24% to $806 million, as compared to the same period in 2008. However, average daily revenue was up 10% to $255,900 due to previously executed contracts and utilization dropped 3% to 84%, as compared to second quarter of 2008.[9] Contract backlog was down 6% from the previous quarter to $33.7 billion. Demand for high-specification floaters has remained high with only 5% of its fleet uncommitted, however demand for standard jack ups is very low with 42% of the company's fleet uncommitted.[10]
Near the end of the second quarter of 2009 Transocean expanded its presence in Brazil through the signing of a new contract with Petrobras (PBR). The contract was for an ultra-deepwater semisubmersible rig for operations in Brazil for three years, with the option of being converted into a five year contract. Revenues for the contract would be $558.5 million for the three year and if elected, $894.3 million for the five year contract.[11]
First Quarter 2009 Summary
In the first quarter of 2009 net income was $942 million after adjusting for costs of $264 million which included costs related with its merger with Global SantaFe (GSF), tax items and impairment of drilling vessels. At the end of the quarter Transocean had a contract backlog of $38 billion.[12]
2008 Summary
At the end of 2008 net income was $4.2 billion up 25.7% from 2007. The increase was primarily due to the realization of GlobalSanteFe's operations for an entire year and higher dayrates.[13]
In the second quarter of 2008, Transocean saw dayrates rise 4% from the first quarter[14], while net income approximately doubled year-on-year, to $1.11 billion.[15] Revenues were $3.102 billion[16], down from $3.110 billion in 1Q08.[16] Backlog grew by $7 billion, to a record $41 billion.[16] The company increased its number of rigs in construction to 10 ultra-deepwater units.[16]
Financials ($ Million) and Geographic Breakdown[17]
2006 2007 2008 2009
Operating Revenue 3,882 6,377 12,674 11,556
U.S. 806 1,259 2,578 2,239
U.K. 439 848 2,012 1,563
Nigeria 447 587 1,096 --
India 291 761 890 1,084
Other 1,899 2,922 6,098 6,670
Operating Income 1,641 3,239 5,357 4,400
In the first quarter of 2008, the company had net income of $1.189 billion, up from 4Q07's $1.056 billion; aside from rising oil prices driving up dayrates, 1Q08 was the first time that the company's financial reports reflected GlobalSantaFe's operations throughout the quarter. Revenues increased from $2.77 billion to $3.11 billion; $919 million of this increase was caused by the inclusion of GlobalSantaFe. These revenues benefited from delays in maintenance on four ships, which indicates that gains in 2Q08 might be offset by increased spending and lower cash flow from operations.
Also, in the first quarter of 2008, Transocean expanded its operations in India, leasing two deepwater vessels in five-year contracts at dayrates over $500,000. Two other deepwater rigs were contracted, one in the Gulf of Mexico by Shell for $535,000 and one in West Africa for $630,000. The company also saw new and renewed contracts on four midwater floaters at over $370,000 each, and six jackups for between $120,000 and $225,000 each.
Transocean earns money by contracting with oil companies, at a daily rate, for the use of its equipment and employees. The company operates in both the exploration and production fields. Its most significant customers are Shell, Chevron, and BP, with respective shares of Transocean's income at 14%, 11%, and 11% in 2006[18]. As of August 2007, the pre-merger company got 54% of its revenues from the major integrated oil companies, 24% from national oil companies, and 21% from independent oil companies[19]. Because the company has relatively few customers, the loss of any significant contracts would have strong, negative effects on Transocean's long-term revenue stream.
Transocean Metrics[20][21] [22][1]
2007 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009[23] 1Q 2010[23] 2Q 2010[24][25]
Average Dayrate $211,900 $240,300 $256,500 $255,900 $283,800 $295,700 $298,300 $284,200
Average Capital Utilization 90% 90% 91% 84% 75% 69% 66% 64%
Transocean - GlobalSantaFe Merger
The 2007 merger made Transocean the worlds largest offshore drilling contractor by market cap, and the largest in the world by fleet size, with a drill rig industry market share of 20%[26]. The new Transocean fleet is more than twice the size of the next largest competitor, giving the company a powerful hand in the industry. It doesn't hurt that Transocean is also known for its quality of equipment and procedure.
Trends and Forces
As an oilfield services company, Transocean's fate is intimately connected to the fate of the oil industry as a whole.
Fire and Ensuing Oil Spill at Transocean and BP Deepwater Horizon rig illustrates potential costs of deepwater drilling offshore and has the potential of bringing forth more safety regulations
In April 2010, a major fire on an oil rig in the Gulf of Mexico owned by BP and operated by Transocean led to the largest oil spill in U.S. history[27]. This has the potential to significantly hamper the development of deepwater offshore oil production and bring forth new safety regulations.[28] People at Transocean believe the blaze was from an uncontrolled burst of oil and gas ("blowout") from the well. In 2007 to 2010, exploration in the Gulf region has increased as oil companies attempt to uncover new sources of oil deep under the ocean. [29] The number of deepwater rigs grew 43% over 2006 to April 2010. Oil produced from deepwater rigs has played an important role in U.S. oil and gas output. The Gulf of Mexico produces 30% of the U.S. oil output and is an important source of revenue for oil majors like BP.[30] As offshore drilling has gained popularity, it has been harder for contractors to find experienced workers willing and able to work these rigs safely. Not only does the fire illustrate the potential dangers these rigs pose, but also it has the potential of creating more strict safety and environmental regulations to avoid possible dangers to human life and the surrounding marine environment.[31]
Due to continued pressure from regulators in Switzerland, where Transocean is based, to postpone payouts to shareholders pending the outcome of liability issues related to the Deepwater Horizon incident, on August 13, 2010, Transocean stood down on $1 billion in dividend payments. The Commercial Register of the Canton of Zug, in Switzerland, rejected Transocean's application for dividend payments.[32]
Transocean's Deepwater Services Depend on High Oil Prices
Oil prices soared over $100/barrel in early 2008, reaching a peak of $145.85 on July 3, 2008.[33] As oil prices went up, oil companies like Shell, Chevron, and BP had greater incentives to increase production; thus, price shifts drove demand for exploration and drilling, and, thus, Transocean's business.
The hot trend in the oil industry is deepwater drilling - with shallower wells yielding less, oil and gas companies are paying large amounts of money to oilfield services companies who can drill where they previously could not. In 2009, oil prices took a dip, due to the financial crisis, averaging $62 per barrel, and unfortunately, as oil prices drop, demand for deepwater rigs slows, and even as day-rates drop, more and more deepwater rigs will sit idle.[34] However, oil prices are rising again, averaging at $79 per barrel during first quarter 2010.[35] Transocean has 48 deepwater drills, with 8 ultra-deepwater rigs in construction.[36]
In a sign that oil and gas companies once more expect oil prices to rise, Transocean's semisubmersible rig, GSF Celtic Sea has been awarded a $350 million 3-year contract by an undisclosed customer for off-shore drilling near Angola commencing in the 2nd quarter of 2011. The GSF Celtic Sea is capable of operating in depths of 5750 feet, and drilling wells up to 25,000 feet deep [37]. This contract could portend increased demand for deepwater drilling amid rising oil prices, and have a positive effect on Transocean's revenues. In further evidence that gas companies expect oil prices to continue rising, Exxon XOM is looking to sign a 1 billion dollar contract with Transocean to build and rent a rig that is capable of drilling in the Arctic. The price represents a daily rate close to the record high that Transocean signed in mid-2008 when oil was near its peak.[38]
Transocean Is Staying in the Water
Because Transocean is investing so much in its deepwater future (with 10 ultra-deepwater units in production in 2010)[39], and ignoring other areas of oilfield services growth. The company is not investing as heavily in the Middle East as competitors like Weatherford International and Halliburton. There is tremendous growth in the region, as new technologies enable companies to extract more from the mature, onshore wells in the area. Transocean, however, has so far resisted growing into this region, and could as a result miss out on revenues from a growing market. On the flip side, however, the technology needed to succeed in the Middle East is expensive, and its success is dependent on high oil prices. Transocean has adopted a strategy of becoming one of the best in the more specific off-shore drilling rigs, and has resisted the urge to expand heavily into on-shore drilling. An added benefit for Transocean lies in the fact that most current deepwater sites are in relatively stable political environments, like the Gulf of Mexico and the UK's North Sea, where oil companies are more likely to want to drill because there is little to no risk of assets being nationalized or attacked.
Red Sky at Morning, Transocean Investors Take Warning
With so much revenue coming from pulling oil and gas out of the Gulf of Mexico (see Business Financials), the hurricane season is always a bad time of year for the company. Third-quarter income is usually lower, as revenue tends to fall because production is brought down to prevent damage from the storms that sweep the coast in late summer. A similar risk lies in drilling in the turbulent U.K. North Sea, where the storm season generally coincides with a fourth-quarter decline in profitability as drilling costs rise.
The Transocean-GlobalSantaFe Merger Might Trigger Industry Consolidation
When Transocean merged with GlobalSantaFe, it created an industry giant. While this provides the company with a number of advantages, competitors will not take the move lightly. It's possible that the merger will intimidate other companies enough to trigger more mergers, creating more drilling companies with huge fleets. If other drilling companies, especially those involved in deepwater drilling, decided to consolidate, it's still up for debate whether less competition drives dayrates higher or drives these larger companies towards a more margin focused approach predicated on economies of scale.
Competition
Though the oilfield services sector consists of large companies like Schlumberger, Halliburton, Baker Hughes, and Weatherford International, Transocean more closely competes with offshore drilling companies like Noble and Diamond Offshore Drilling.
Noble: 86% of Noble's fleet of 66 rigs were deployed internationally in early 2007[40], with its markets ranging from the Gulf of Mexico to India, Mexico, the North Sea, the Middle East, and West Africa.
Diamond Offshore Drilling: 21 of Diamond's 44 rigs were deployed in the American Gulf of Mexico[41], with the rest divided between Brazil, Malaysia, Australia, New Zealand, Egypt, Vietnam, the North Sea, and the Middle East.
Rowan Companies - Rowan's 21 jack-ups specialize in harsh environment, shallow-water drilling, and are deployed in the Gulf of Mexico, Middle East, North Sea, offshore eastern Canada, offshore West Africa, and Trinidad. The company also operates 29 onshore deep-well rigs.[42]
ENSCO International - ENSCO's fleet of 45 ships has an average age under seven years, making it one of the youngest in the industry.
All companies have deepwater-capable technologies, creating some competitive pressure for Transocean on that emerging front; to give perspective, however, one should note that Transocean's deepwater fleet alone is larger than Diamond's entire fleet. More threatening, possibly, are the entrances of the major oilfield services companies like Baker Hughes into the deepwater industry, as they have large amounts of capital with which to develop strong products and services.
Transocean also faces a threat from ChevronTexaco, as the oil major that is also one of Transocean's biggest customers has partnered with the Massachusetts Institute of Technology (MIT) to develop ultra-deepwater technology, indicating that the company might be moving towards establishing its own drilling business. This would both deny Transocean a major customer and create a new competitor for the company.
Offshore Drilling Industry Metrics for 2008
Transocean[43] Noble[44] Diamond Offshore Drilling[45] Rowan Companies[46] ENSCO International[47]
Average Day Rate (thousands) $240 $164 N/A $163 $155
Average Fleet Utilization 90% 88% 91% 95% 96%
Average Number of Offshore Rigs 136 62 45 29 52
President Barack Obama announced on March 31, 2010, that he would open up large swaths of the Eastern Seaboard to off-shore drilling. The proposal allows companies to lease land and drill for oil and natural gas from the tip of Florida to the northern end of Delaware, as well as certain locations in the Gulf of Mexico and by Alaska. The proposed bill would still protect regions that are considered to be delicate, and all drilling would take place only after research to determine the effect on the environment. Already the bill has been met with resistance by Republicans who say it does not go far enough, and with harsh criticism from environmentalists. The additional areas in the Gulf of Mexico could hold up to 3.5 billion barrels of oil and 17 trillion cubic feet of natural gas, but the start to any such drilling would still be several years off [3]
Contents
1 Business Financials
1.1 Transocean - GlobalSantaFe Merger
2 Trends and Forces
2.1 Fire and Ensuing Oil Spill at Transocean and BP Deepwater Horizon rig illustrates potential costs of deepwater drilling offshore and has the potential of bringing forth more safety regulations
2.2 Transocean's Deepwater Services Depend on High Oil Prices
2.3 Transocean Is Staying in the Water
2.4 Red Sky at Morning, Transocean Investors Take Warning
2.5 The Transocean-GlobalSantaFe Merger Might Trigger Industry Consolidation
3 Competition
4 Notes
Business Financials
Third Quarter 2010 Summary
For the third quarter of 2010, Transocean reported contract revenue of $2.3 billion, an 18% decrease from the same quarter in 2009, while net income decreased 46% to $378 million. Despite new revenue generated by operations commenced in 2010, many factors caused the decline in drilling revenues. During the quarter, there were 42 stacked or idle rigs, compared to 29 rigs in the same period in 2009--this accounted for approximately $375 million in reduced drilling business. Additionally, the U.S. Gulf of Mexico drilling moratorium accounted for a loss of $130 million, higher out-of-service time for maintenance and repairs accounted for reduced revenue of $55 million, and approximately $40 million in revenues associated with the Deepwater Horizon contract were lost during the quarter.[4]
Second Quarter 2010 Summary
For the second quarter of 2010, contract revenue was $2.290 billion, down 12.7% from the same quarter in 2009, while net income was $720 million, down 10.9% percent from the same quarter in 2009. Despite having higher average daily revenue and $270 million revenue from newer fleets that commenced operations in 2009 and 2010, these decreases occurred because of lower utilization. Reduced drilling revenues were mainly due to $345 million attributed to 36 rigs that were stacked or idle, double the amount that were stacked or idle in the same period in 2009, and $170 million attributed to higher out-of-service time due to mobilization, maintenance, and repairs. Approximately $40 million in revenues associated with the Deepwater Horizon contract were lost during the quarter.[5]
First Quarter 2010 Summary
Despite the completion of newbuild projects and the commencement of operations at many new rigs, revenue for the first quarter of 2010 was down 26% from the same period in 2009 to $8.2 billion. Net income was also down 4% from the year earlier period to $723 million. These declines were mainly attributed to lengthier out-of-service times required for rig maintenance and continued poor market conditions. These conditions required Transocean to keep 33 rigs idle, as opposed to only 6 idle in the same period in 2009. However, due to the stacking of Midwater Floaters and Jackups fleets average daily revenue increased since they are contracted at lower dayrates as compared to High-Specification Floaters.[6]
Also impacting the first quarter, on April 20, 2010, an explosion on Transocean's enterprise-class rig Deepwater Horizon left 11 crew members presumed dead and several others injured. Although the rig was at the time under a lease to BP until September 2013, the subsequent loss of the rig resulted in an automatic termination of the leasing agreement. The rig was insured for up to $560 million, however the associated backlog amounted to $590 million and Transocean is uncertain about additional costs and insurance recoveries.[7]
Fourth Quarter 2009 Summary
For the fourth quarter of 2009 revenue was down to 2.73 billion dollars, a 16% decrease from the same period in 2009, and net income was $685 million, a 27% decrease from the previous year. Part of the decrease in net income can be explained by the $142 million that RIG had to pay the Brazilian government when an import permit for one of its rigs expired. Currently of its 65 shallow water rigs 28 are sitting idle since market conditions remain poor, but Transocean feels like the market has stabilized and that at least a few of those rigs should find work in the coming weeks.[8]
Third Quarter 2009 Summary
For the third quarter of 2009 revenue was down 2%, as compared to the second quarter of 2009, to $2.82 billion. Net income was down 33% to $710 million as compared to the same period in 2008. Revenues were adversely impacted by charges from litigation matters and decreases in rig activity. Negative impacts were partially offset by the commencement of two new drillships and improvement in dayrates.[1]
Second Quarter 2009 Summary
At the end of the second quarter of 2009 operating revenue was down 7% to $2.88 billion and net income was down 24% to $806 million, as compared to the same period in 2008. However, average daily revenue was up 10% to $255,900 due to previously executed contracts and utilization dropped 3% to 84%, as compared to second quarter of 2008.[9] Contract backlog was down 6% from the previous quarter to $33.7 billion. Demand for high-specification floaters has remained high with only 5% of its fleet uncommitted, however demand for standard jack ups is very low with 42% of the company's fleet uncommitted.[10]
Near the end of the second quarter of 2009 Transocean expanded its presence in Brazil through the signing of a new contract with Petrobras (PBR). The contract was for an ultra-deepwater semisubmersible rig for operations in Brazil for three years, with the option of being converted into a five year contract. Revenues for the contract would be $558.5 million for the three year and if elected, $894.3 million for the five year contract.[11]
First Quarter 2009 Summary
In the first quarter of 2009 net income was $942 million after adjusting for costs of $264 million which included costs related with its merger with Global SantaFe (GSF), tax items and impairment of drilling vessels. At the end of the quarter Transocean had a contract backlog of $38 billion.[12]
2008 Summary
At the end of 2008 net income was $4.2 billion up 25.7% from 2007. The increase was primarily due to the realization of GlobalSanteFe's operations for an entire year and higher dayrates.[13]
In the second quarter of 2008, Transocean saw dayrates rise 4% from the first quarter[14], while net income approximately doubled year-on-year, to $1.11 billion.[15] Revenues were $3.102 billion[16], down from $3.110 billion in 1Q08.[16] Backlog grew by $7 billion, to a record $41 billion.[16] The company increased its number of rigs in construction to 10 ultra-deepwater units.[16]
Financials ($ Million) and Geographic Breakdown[17]
2006 2007 2008 2009
Operating Revenue 3,882 6,377 12,674 11,556
U.S. 806 1,259 2,578 2,239
U.K. 439 848 2,012 1,563
Nigeria 447 587 1,096 --
India 291 761 890 1,084
Other 1,899 2,922 6,098 6,670
Operating Income 1,641 3,239 5,357 4,400
In the first quarter of 2008, the company had net income of $1.189 billion, up from 4Q07's $1.056 billion; aside from rising oil prices driving up dayrates, 1Q08 was the first time that the company's financial reports reflected GlobalSantaFe's operations throughout the quarter. Revenues increased from $2.77 billion to $3.11 billion; $919 million of this increase was caused by the inclusion of GlobalSantaFe. These revenues benefited from delays in maintenance on four ships, which indicates that gains in 2Q08 might be offset by increased spending and lower cash flow from operations.
Also, in the first quarter of 2008, Transocean expanded its operations in India, leasing two deepwater vessels in five-year contracts at dayrates over $500,000. Two other deepwater rigs were contracted, one in the Gulf of Mexico by Shell for $535,000 and one in West Africa for $630,000. The company also saw new and renewed contracts on four midwater floaters at over $370,000 each, and six jackups for between $120,000 and $225,000 each.
Transocean earns money by contracting with oil companies, at a daily rate, for the use of its equipment and employees. The company operates in both the exploration and production fields. Its most significant customers are Shell, Chevron, and BP, with respective shares of Transocean's income at 14%, 11%, and 11% in 2006[18]. As of August 2007, the pre-merger company got 54% of its revenues from the major integrated oil companies, 24% from national oil companies, and 21% from independent oil companies[19]. Because the company has relatively few customers, the loss of any significant contracts would have strong, negative effects on Transocean's long-term revenue stream.
Transocean Metrics[20][21] [22][1]
2007 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009[23] 1Q 2010[23] 2Q 2010[24][25]
Average Dayrate $211,900 $240,300 $256,500 $255,900 $283,800 $295,700 $298,300 $284,200
Average Capital Utilization 90% 90% 91% 84% 75% 69% 66% 64%
Transocean - GlobalSantaFe Merger
The 2007 merger made Transocean the worlds largest offshore drilling contractor by market cap, and the largest in the world by fleet size, with a drill rig industry market share of 20%[26]. The new Transocean fleet is more than twice the size of the next largest competitor, giving the company a powerful hand in the industry. It doesn't hurt that Transocean is also known for its quality of equipment and procedure.
Trends and Forces
As an oilfield services company, Transocean's fate is intimately connected to the fate of the oil industry as a whole.
Fire and Ensuing Oil Spill at Transocean and BP Deepwater Horizon rig illustrates potential costs of deepwater drilling offshore and has the potential of bringing forth more safety regulations
In April 2010, a major fire on an oil rig in the Gulf of Mexico owned by BP and operated by Transocean led to the largest oil spill in U.S. history[27]. This has the potential to significantly hamper the development of deepwater offshore oil production and bring forth new safety regulations.[28] People at Transocean believe the blaze was from an uncontrolled burst of oil and gas ("blowout") from the well. In 2007 to 2010, exploration in the Gulf region has increased as oil companies attempt to uncover new sources of oil deep under the ocean. [29] The number of deepwater rigs grew 43% over 2006 to April 2010. Oil produced from deepwater rigs has played an important role in U.S. oil and gas output. The Gulf of Mexico produces 30% of the U.S. oil output and is an important source of revenue for oil majors like BP.[30] As offshore drilling has gained popularity, it has been harder for contractors to find experienced workers willing and able to work these rigs safely. Not only does the fire illustrate the potential dangers these rigs pose, but also it has the potential of creating more strict safety and environmental regulations to avoid possible dangers to human life and the surrounding marine environment.[31]
Due to continued pressure from regulators in Switzerland, where Transocean is based, to postpone payouts to shareholders pending the outcome of liability issues related to the Deepwater Horizon incident, on August 13, 2010, Transocean stood down on $1 billion in dividend payments. The Commercial Register of the Canton of Zug, in Switzerland, rejected Transocean's application for dividend payments.[32]
Transocean's Deepwater Services Depend on High Oil Prices
Oil prices soared over $100/barrel in early 2008, reaching a peak of $145.85 on July 3, 2008.[33] As oil prices went up, oil companies like Shell, Chevron, and BP had greater incentives to increase production; thus, price shifts drove demand for exploration and drilling, and, thus, Transocean's business.
The hot trend in the oil industry is deepwater drilling - with shallower wells yielding less, oil and gas companies are paying large amounts of money to oilfield services companies who can drill where they previously could not. In 2009, oil prices took a dip, due to the financial crisis, averaging $62 per barrel, and unfortunately, as oil prices drop, demand for deepwater rigs slows, and even as day-rates drop, more and more deepwater rigs will sit idle.[34] However, oil prices are rising again, averaging at $79 per barrel during first quarter 2010.[35] Transocean has 48 deepwater drills, with 8 ultra-deepwater rigs in construction.[36]
In a sign that oil and gas companies once more expect oil prices to rise, Transocean's semisubmersible rig, GSF Celtic Sea has been awarded a $350 million 3-year contract by an undisclosed customer for off-shore drilling near Angola commencing in the 2nd quarter of 2011. The GSF Celtic Sea is capable of operating in depths of 5750 feet, and drilling wells up to 25,000 feet deep [37]. This contract could portend increased demand for deepwater drilling amid rising oil prices, and have a positive effect on Transocean's revenues. In further evidence that gas companies expect oil prices to continue rising, Exxon XOM is looking to sign a 1 billion dollar contract with Transocean to build and rent a rig that is capable of drilling in the Arctic. The price represents a daily rate close to the record high that Transocean signed in mid-2008 when oil was near its peak.[38]
Transocean Is Staying in the Water
Because Transocean is investing so much in its deepwater future (with 10 ultra-deepwater units in production in 2010)[39], and ignoring other areas of oilfield services growth. The company is not investing as heavily in the Middle East as competitors like Weatherford International and Halliburton. There is tremendous growth in the region, as new technologies enable companies to extract more from the mature, onshore wells in the area. Transocean, however, has so far resisted growing into this region, and could as a result miss out on revenues from a growing market. On the flip side, however, the technology needed to succeed in the Middle East is expensive, and its success is dependent on high oil prices. Transocean has adopted a strategy of becoming one of the best in the more specific off-shore drilling rigs, and has resisted the urge to expand heavily into on-shore drilling. An added benefit for Transocean lies in the fact that most current deepwater sites are in relatively stable political environments, like the Gulf of Mexico and the UK's North Sea, where oil companies are more likely to want to drill because there is little to no risk of assets being nationalized or attacked.
Red Sky at Morning, Transocean Investors Take Warning
With so much revenue coming from pulling oil and gas out of the Gulf of Mexico (see Business Financials), the hurricane season is always a bad time of year for the company. Third-quarter income is usually lower, as revenue tends to fall because production is brought down to prevent damage from the storms that sweep the coast in late summer. A similar risk lies in drilling in the turbulent U.K. North Sea, where the storm season generally coincides with a fourth-quarter decline in profitability as drilling costs rise.
The Transocean-GlobalSantaFe Merger Might Trigger Industry Consolidation
When Transocean merged with GlobalSantaFe, it created an industry giant. While this provides the company with a number of advantages, competitors will not take the move lightly. It's possible that the merger will intimidate other companies enough to trigger more mergers, creating more drilling companies with huge fleets. If other drilling companies, especially those involved in deepwater drilling, decided to consolidate, it's still up for debate whether less competition drives dayrates higher or drives these larger companies towards a more margin focused approach predicated on economies of scale.
Competition
Though the oilfield services sector consists of large companies like Schlumberger, Halliburton, Baker Hughes, and Weatherford International, Transocean more closely competes with offshore drilling companies like Noble and Diamond Offshore Drilling.
Noble: 86% of Noble's fleet of 66 rigs were deployed internationally in early 2007[40], with its markets ranging from the Gulf of Mexico to India, Mexico, the North Sea, the Middle East, and West Africa.
Diamond Offshore Drilling: 21 of Diamond's 44 rigs were deployed in the American Gulf of Mexico[41], with the rest divided between Brazil, Malaysia, Australia, New Zealand, Egypt, Vietnam, the North Sea, and the Middle East.
Rowan Companies - Rowan's 21 jack-ups specialize in harsh environment, shallow-water drilling, and are deployed in the Gulf of Mexico, Middle East, North Sea, offshore eastern Canada, offshore West Africa, and Trinidad. The company also operates 29 onshore deep-well rigs.[42]
ENSCO International - ENSCO's fleet of 45 ships has an average age under seven years, making it one of the youngest in the industry.
All companies have deepwater-capable technologies, creating some competitive pressure for Transocean on that emerging front; to give perspective, however, one should note that Transocean's deepwater fleet alone is larger than Diamond's entire fleet. More threatening, possibly, are the entrances of the major oilfield services companies like Baker Hughes into the deepwater industry, as they have large amounts of capital with which to develop strong products and services.
Transocean also faces a threat from ChevronTexaco, as the oil major that is also one of Transocean's biggest customers has partnered with the Massachusetts Institute of Technology (MIT) to develop ultra-deepwater technology, indicating that the company might be moving towards establishing its own drilling business. This would both deny Transocean a major customer and create a new competitor for the company.
Offshore Drilling Industry Metrics for 2008
Transocean[43] Noble[44] Diamond Offshore Drilling[45] Rowan Companies[46] ENSCO International[47]
Average Day Rate (thousands) $240 $164 N/A $163 $155
Average Fleet Utilization 90% 88% 91% 95% 96%
Average Number of Offshore Rigs 136 62 45 29 52