24Nov 2016

Transocean – The Largest Offshore Driller

saupload_zkaejzuedcjc95tsewm-ju6cjjjhigxawn_0ge5wvhav-4av3kklde67-folomiwvbzxgtrf76va260hi9eypuzqvsntwswkkw_gfmqb705pwb67fwqnvezpqw0qp1wyngnhq-2v

Transocean Logo – Smarter Analyst

Summary

  • More than $10 billion in investor capital has been wiped out from the start of the oil crash and Transocean’s stock price has dropped from almost $45 per share.
  • Transocean has a industry leading backlog of more than $12 billion and this backlog will continue providing Transocean with cash flow until the 2020s.
  • Combined with Transocean’s strong debt maturity schedule, Transocean has significant capital and is a strong investment at the present time.

Introduction

Transocean Ltd (NYSE: RIG) is the world’s largest offshore drilling contractor based from Switzerland. The company has offices in more than twenty different countries and operates in many more and it operates in countries with significant demand for its rigs. In 2010, Transocean owned the rig that failed in the Deepwater Horizon spill costing the company more than $1 billion.

Transocean has had an incredibly difficult time since the start of the oil crash. Transocean’s pre-crash stock price peaked at just under $45 per share. From that point, Transocean’s stock fell by more than 80% to its February 2016 lows of just over $8 per share. From that point, however, Transocean’s stock price has recovered by just over 35% to its present share price of roughly $11 per share.

With a market cap of roughly $4.2 billion, Transocean is the largest offshore driller in the world. This does not mean, however, that Transocean does not have room to recover and grow. The company has seen more than $10 billion in investor capital wiped out since the start of the market crash. Despite this, as we will see, Transocean has the strength to weather the oil crash and emerge stronger than ever.

Transocean Overview

Now that we have a brief introduction to Transocean along with a discussion of the company’s recent stock performance, it is now time to start by discussing Transocean as a whole.

Transocean Investment Highlights – Transocean Investor Presentation

Transocean has the largest fleet of high-specification ultra-deepwater and high-efficiency floaters with 17 new floaters added since 2008. That means that the company’s total fleet has 41 high-specification floaters that can garner long-term high income contracts. As a result of this enormous fleet, Transocean has unmatched experienced and operates in major markets worldwide with strong customer relationships.

Transocean’s actions mean that as of the end of October 2016, Transocean has a astounding $12.2 billion of backlog or a 3:1 backlog to market cap position. That backlog will continue to provide Transocean with strong income for years to come allowing the company to handle a drawn out oil crash. At the same time, on top of this backlog, Transocean has an additional $5.5 billion of liquidity allowing the company to focus on either paying off its debt or use the market turmoil as a chance to make an acquisition.

Transocean Rigs – Transocean Investor Presentation

More importantly, Transocean has focused on keeping its fleet young and competitive in the global markets. Since 2008, Transocean has had 17 drillships delivered, including 3 additional new ones just in 2016. On top of its present fleet, Transocean expects another 2 contract-backed drillships will join the fleet in the coming years making the company’s average fleet age even younger while increasing annual income.

Transocean Backlog

Now that we have an overview of Transocean including the company’s enormous fleet, it is now time to discuss the company’s impressive $12.2 billion in backlog.

Transocean Backlog Interview – Transocean Investor Presentation

Transocean’s backlog is well split up with $3.8 billion in 2016. For the next few years, the company’s backlog falls rapidly as rigs that tend to have shorter contracts (basically anything that’s not an ultra-deepwater floater) come off of contract. However, from 2020 to 2028, Transocean expects to maintain fairly strong backlog of more than $0.5 billion per year.

On top of all this, Transocean has extensive customer relationships and its backlog is focused on very secure companies. The chance of the company not being able to gain additional contracts during this time period, even if the oil market remains how it is, is incredibly unlikely. However, the important thing to see here today, is even today, in the midst of one of the worst oil crashes of recent history, Transocean has the backlog to survive into the 2020s.

Transocean Backlog Timeline – Transocean Investor Presentation

This next image shows Transocean’s backlog broken down by year compared to its major competitors. Here, we get a much better idea of the strength that Transocean has compared to its peers. Even Transocean’s closest competitor in terms of backlog, Noble Corporation (NYSE: NE), sees its backlog end in 2023. Transocean, however, manages to maintain its backlog at just under $1 billion per year into 2025. This shows the company’s ability to continue earning money in the event of a drawn out oil crash.

Oil Demand and Supply Balance – Vox CDN

This next image, discussing the demand and supply balance in the oil markets, will provide us a better idea of how long Transocean needs to survive. The oil surplus in supply first occurred in 3Q 2013 and from that point it took 9 quarters for oil prices to reach what was seen as their bottom in 1Q 2016. Given that the oil surplus is expected to end roughly 4Q 2016, we can expect that similar to how it took 9 quarters for oil prices to crash, it will take roughly 9 quarters for them to recover.

As a result, from this, we can see that oil prices can be expected to have partially recovered by 1Q 2019. At this point, Transocean will still have a backlog of almost $1.5 billion compared to many of its peers that will be struggling with a much weaker backlog. We will analyze Transocean’s debt load further coming up, but it seems Transocean can easily handle a drawn out crash from a revenue perspective.

Transocean Financials

Now that we have discussed Transocean’s fleet and backlog along with come up with a timeline for a recovery in oil prices, it is time to finish up by discussing Transocean’s financials.

Transocean Liquidity – Transocean Investor Presentation

This next image provides an overview of Transocean’s expected liquidity until December 31, 2018, not long from the time we expected oil prices to recover by above. As we can see, Transocean currently has $3.1 billion in cash boosted by an October 2016 $0.5 billion in senior secured note sales. Transocean also currently has a $3.0 billion revolving credit facility and expects to earn another $1.4 billion in cash flow from now until year-end 2018.

In terms of expenses, from now until late-2018, Transocean has $1.2 billion in capex due along with an additional $2.4 billion in debt due until 2018. Ignoring the company’s revolving credit facility which would involved the withdrawal of additional debt, Transocean will have $4.5 billion in cash from now until late-2018 and $3.6 billion in expenses.

That means not even counting Transocean’s revolving credit facility, the company will end late-2019 with $0.9 billion in cash. At the same time, Transocean will continue earning cash from its backlog showing the company’s strength.

Transocean Debt Maturity Schedule – Transocean Investor Presentation

This next image provides a further overview of Transocean’s debt maturity schedule. From now until 2018, Transocean will have $2.5 billion in debt due. The company’s revolver due in 2019 means that the revolver won’t be very useful to use. However, with the company’s remaining $0.9 billion in cash at year-end 2018, Transocean will be able to pay off its debt until close to 2021.

This shows Transocean’s financial strength and why the company is a strong investment at the present price.

Conclusion

Transocean has had a very difficult time from the start of the oil crash with more than $10 billion in investor capital wiped out. Transocean’s stock price dropped by more than 80% to its February 2016 lows before since partially recovering. However, despite this, Transocean is the largest offshore driller in the world with a market cap of more than $4 billion.

Despite this, Transocean is an incredibly strong offshore driller. The company has a backlog that will last until the late 2020s and the company’s backlog will stay at more than $1 billion annually from now until the mid-2020s. This backlog will continue to provide Transocean with strong cash flows. On top of that, Transocean has minimal debt due over the coming years, meaning by 1Q 2019, when I think oil prices will recover, Transocean will still have almost $1 billion in cash.

seekingalpha.com

Disclosure: © 2016 Seeking Alpha 

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.

“The views expressed are the author’s own and all readers should do their own research and seek appropriate financial and regulated stockbroker advice.”

logo

If anyone reads this article found it useful, helpful? Then please subscribe www.share-talk.com or follow @SHARE TALK on our Twitter page for future updates.

Terms of Website Use

All information is provided on an as-is basis. Where we allow Bloggers to publish articles on our platform please note these are not our opinions or views and we have no affiliation with the companies mentioned.

 



London South East Investment Forums