Something about the Oilfield and its players - Transocean Battens Down The Hatches

Transocean Battens Down The Hatches

Summary

RIG sold $1.4B in rig assets to Borr.

It protects liquidity and unloads newbuilds that it might not need.

With oil sub-$50, capex might not return to offshore for a while.

It's smart to batten down the hatches.

According to Reuters 

Transocean (NYSE:RIG) is selling its shallow-water drilling rigs for $1.35 billion to Borr Drilling:

Borr Drilling, founded by former executives of financially troubled Seadrill (NYSE:SDRL), has snapped up Transocean's fleet of shallow-water drilling rigs for $1.35 billion.

Since then Troeim has re-established himself as an independent player in the global shipping market with a high profile and a reputation for successful capital raising.

The rig market deal is Borr's biggest since it was set up last year by Tor Olav Troeim and other executives who had left Seadrill, once the jewel in the crown of Norwegian-born shipping tycoon John Fredriksen but now battling with $14 billion in debt and liabilities.

The deal includes 10 high-specification jack-ups and five newbuilds. Transocean will retain 50 rigs used for exploration in deeper waters.

Transocean Is Battening The Hatches

The decline in oil prices from their Q2 2014 peak have ravaged energy-related names. It has hit the offshore drilling market particularly hard given the segment has the highest break-even costs. Unbridled expansion by certain offshore contractors helped contribute to their own demise. That said, the offshore market remains oversupplied and day rates continue to fall. Transocean's average day rates fell 1% sequentially.

The biggest decline was in Mid-Water Floaters which saw day rates fall 47%; Ultra-deepwater Floaters were next with an 18% decline. Moreover, fleet utilization was only 46% during the quarter, down from 49% in Q3 and 60% in the year earlier period. Falling day rates and subpar utilization do not bode well.

The land-drilling sector of the oil industry staged a rebound in Q4 2016; however, the market for offshore drilling remains in the doldrums, and the offshore contracting market remains oversupplied. Transocean's rig utilization remains under 50%, and its Q4 revenue fell sequentially by 10%. High-specification jack-ups experienced flat revenue growth during the quarter and currently represents about 8% of total revenue.

Revenue growth will likely be subpar for a while. According to management, prices might have to stay above $60 for capex to return to the offshore sector:

While we and the rest of the off-shore drilling industry have done an admirable job of reducing cost through the downturn, the IOCs are unlikely to sanction new projects until we see a sustainable price per barrel in excess of $60.

That could be problematic as oil prices have now fallen below $50. The OPEC supply cut helped, but the pick up in shale drilling increased supply and hurt prices.

The Transaction Helps Protect Liquidity

If $60 per barrel is a key metric and that metric will not be reached any time soon, the goal for offshore contractors should be to survive. This transaction should help Transocean to do that. At year-end 2016 the company had cash of $2.5 billion and debt of $8.3 billion. Its debt/EBITDA of 3.9x is nothing to write home about, but it is better than Seadrill's 7.1x.

The company would forgo revenue from High-Specification jack-ups of $66 million per quarter. However, it would bring in nearly $1.4 billion, allowing it to monetize certain of its rig assets. Transocean could use this cash inflow to offset the nearly $1.1 billion it obligated to pay for five newbuilds. I believe this is a savvy move by management to protect its balance sheet and unload newbuilds to Borr that it does not need.

The move also signals that growth in offshore drilling could be dead for a long time. Investors should take heed.

Conclusion

This is a savvy move by Transocean. With oil sub-$50 I expect its revenue and EBITDA to remain challenged. With RIG trading at 5.3x trailing EBITDA I rate the stock a hold.

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. I have no business relationship with any company whose stock is mentioned in this article.