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Transocean: Hope Alone Is Not A Strategy by Fun Trader

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Summary

  • Transocean's total revenues in 3Q 2019 decreased to $784 million from $816 million in the same period of 2018. The third-quarter 2019 adjusted net loss was $234 million or $0.38.
  • Transocean is essentially an ultra-deepwater business, with over 70.6% of the total backlog attached to the Ultra-Deepwater portion.
  • This transitioning period creates a high level of volatility. Thus, it is essential to take advantage of these sharp swings by trading a significant portion of your position.

Transocean - The HE Semisub Leiv Eriksson. Year Built: 2001 - Source: MarineTraffic

Investment Thesis

Transocean (RIG) is one of the rare offshore drillers that I can see financially stable, even if we could always worry about the debt level, thanks to a record backlog of about $10.6 billion as of 08/30/2019.

I still own the company stock long term, and it represents the most substantial investment in the offshore drilling sector for me and my family portfolio. Our long position has been reduced by more than 75% in the past two years.

We continue to reduce our position, and we have shifted strategy to a more short-term approach, which has been very rewarding. The primary reason for supporting this long-term investment is quite simple.

Even if the industry is walking through a period of fierce headwinds, Transocean will ultimately survive and eventually thrive again. We will have to be patient, extremely patient.

The fundamental fact is that offshore drilling is part of the oil equation and cannot be replaced, despite the US Shale, and its impact on oil exploration is visible.

Exploration CapEx has been reduced to a dismal level, and the result is apparent. Rystad Energy indicated recently that in 2019, so far, the resource reserve replacement ratio is at a 20-year record low, and for 6 barrels of oil consumed, only one barrel is replaced.

This transitioning period creates a high level of volatility. Thus, it is essential to take advantage of these sharp swings by trading a significant portion of your position. A minimum of 30-50% of your RIG position based mainly on the future oil price outlook is recommended.

RIG fluctuates in correlation with oil prices; this is a fact, even though oil prices should not be what drives growth for this sector, at least directly.

Fleet status and backlog snapshot

I suggest reading my preceding article about the September fleet status published on Seeking Alpha. However, a few items have changed since September. The company confirmed that three drillships would be scrapped, and CEO Jeremy Thigpen confirmed at the conference call that the Leiv Eriksson got awarded a 125-day contract in 2020.

I'm pleased to report ConocoPhillips just recently signed the Leiv Eriksson for 125 days at a healthy day rate in Norway starting in August of 2020.

Thus, the contract backlog is now estimated at ~$10.6 billion (10/30/2019,) including Songa Offshore and Ocean Rig UDW.

One encouraging sign that makes me think we may have reached the bottom is that the average day rate in the second quarter rose to $314,500/d from the year-ago level of $295k/d.

However, it is quite difficult to compare those two numbers because last year, RIG was still receiving day rate from its jack-up and also the Deepwater segment. But if we look at the two main parts, which are the ultra-deepwater and the Harsh Environment floaters, we have $318.9K/d versus 324.8K/d, which is quite similar.

Below is the backlog repartition between ultra-drillships, semi-submersibles, and the rest of the fleet.

One specific parameter that distinguishes the company from all the other offshore drillers is that Transocean possesses a backlog of ~$5 billion with Shell (RDS.A) (RDS.B) extending until 2028.

...Read the Full Post On Seeking Alpha

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