Transocean Biggest Winner From 28% Jump in Oil Rig Rates: Energy
Stock Chart for Transocean Ltd (RIG)
Transocean Ltd. (RIG), the deep-water rig owner that’s trailed competitors in the stock market since its equipment burned and sank in the 2010 Gulf of Mexico oil spill, is set to benefit the most this year from a surge in demand.
Rental rates for ultra-deep-water rigs, the world’s most complex and expensive drilling vessels, should climb 28 percent to a record $714,000 a day by the third quarter from about $560,000 currently, according to estimates by Ole Slorer, an analyst at Morgan Stanley who dubs the move a “super spike.”
Transocean, the world’s biggest owner of offshore rigs, will have more units available for leasing than rivals through 2013. That positions the Swiss company better to supply vessels that can cost $600 million each to explorers from Exxon Mobil Corp. (XOM) to BP Plc (BP/) that are leading the search for crude miles below some of the world’s deepest oceans.
“Our long-term outlook for ultra-deep-water is very, very robust,” Transocean Chief Executive Officer Steven Newman told investors March 26 at the Howard Weil Energy Conference in New Orleans. Demand can only grow as explorers must book rigs further into the future to get their wells drilled, he said.
The stock has led peers this year with a gain of 40 percent, cutting its loss since the April 20, 2010, oil spill at BP Plc’s Macondo well to 42 percent. That’s still the biggest decline of any offshore driller in the period.
Transocean fell 2 percent to $53.66 at the close in New York. Crude oil for May delivery declined 1.8 percent to $105.41 a barrel on the New York Mercantile Exchange, the lowest settlement since March 22. Prices are up 6.7 percent this year.
The Vernier, Switzerland-based company surprised investors by taking rates back to near-record territory on March 15 when it announced a two-year contract with an undisclosed operator at about $650,000 a day.
The contract could climb to about $695,000 if the renter opts to continue the lease after the first two years, said Charles Minervino, an analyst at Susquehanna International Group. The record, set last year, is $703,000 a day, according to IHS Petrodata, which didn’t disclose the owner.
James Crandell, an analyst at Dahlman Rose & Co., called the Transocean contract a “monster rate” in a note to investors the next day.
The company will more than double earnings before interest, tax, depreciation and amortization over the next year, beating its peers, as some of the claims for liability in the Gulf spill were set aside and more of its rigs go to work at higher rates, according to data from analysts compiled by Bloomberg.
After going on a buying spree to bulk up its fleet, Transocean was stuck with more out-of-work rigs than its peers during the recession, said Brian Uhlmer, an analyst at Global Hunter Securities in Houston. The driller couldn’t get contracts on some of its new rigs during the downturn, or re-sign rigs as contracts expired.
Demand for offshore rigs had cooled amid the worst global recession since World War II, coupled with falling oil prices and a freeze on drilling in the Gulf of Mexico as the U.S. government decided on new safety rules after the BP spill.
Rates tumbled to about $400,000 a day in mid-2010 from records of about $600,000 a day in 2008.
Transocean owned the $365 million Deepwater Horizon rig that was destroyed in the explosion that triggered the BP spill. Transocean’s Ebitda over the past 12 months fell 54 percent, the worst among peers, according to data compiled by Bloomberg.
As demand revives with accelerated drilling in the U.S. Gulf and off the coasts of Brazil and Africa, Transocean now has the most rigs available to cash in on rising rates, said Scott Gruber, an analyst at Sanford C. Bernstein.
Out of its fleet of 132, Transocean has five of the high- tech drill ships waiting for work, and nine with contracts ending within the next 12 months, Gruber wrote in a March 20 note to investors. Two more are expected to leave the construction yard starting in 2013.
Exxon, Royal Dutch Shell Plc (RDSA) and BP are among major energy companies exploring increasingly hostile environments as the world’s easiest-to-tap fields dry up. Some of the biggest recent discoveries have been in water more than a mile deep in the U.S. Gulf of Mexico and buried under layers of rock-like salt off the coasts of Brazil and West Africa.
To reach those resources, companies such as Transocean, Ensco Plc (ESV) and Noble Corp. (NE) are being asked to provide rigs with sturdier equipment and better technology that can safely handle the greater depths and more difficult conditions. The vessels can take three years to build and carry a price tag of more than $600 million each.
Rental rates for the most modern deep-water rigs, which Morgan Stanley (MS)’s Slorer calls the “new Ferraris” of the oil world, should remain above $600,000 a day through the second quarter of 2014, he told investors on a webcast last month after publishing a research note titled the “Imminent Offshore Rig Rate ‘Super Spike.’”
Those prices justify operators’ decisions, some made before the oil spill, to build more rigs, said Pete Miller, chief executive officer at National Oilwell Varco Inc. (NOV), in an interview at the Howard Weil conference.
Seadrill Ltd. (SDRL), the second-largest owner of ultra-deep-water rigs, can recoup its $600 million investment in new vessels in five years based on dayrates of $550,000, Chief Executive Officer Alf Thorkildsen told investors today at the Howard Weil conference.
“The market, I have not seen better than what we have today in deep water,” Thorkildsen said.
The race to lock up the best rigs available will lift all deep-water rig owners and suppliers, James C. West, an analyst at Barclays Capital in New York, said in an interview.
“We’re definitely getting towards party mode,” he said of the atmosphere among deep-water drillers.
National Oilwell Varco, the largest provider of drilling rig gear to the deep-water vessels, is expected to supply at least 85 percent of the equipment for new rig construction, according to a March 16 analyst note from Dahlman Rose & Co.
Some drilling contractors are waiting to lease their rigs as rates climb higher, said Miller, National Oilwell Varco’s CEO. At least one rig owner may be holding out for $700,000 a day, he said.
“I would argue if you’re getting $600,000 a day, you’re in tall cotton,” Miller said.
The Three R’s
Rowan, a new entrant to the deep-water market, has three new rigs under construction. The rigs, named the Reliance, the Resolute and the Renaissance, are being built in the Hyundai Heavy Industries Co. shipyard in South Korea and will roll out beginning in late 2013.
J. David Anderson, an analyst at JP Morgan, estimates the rigs could snag rates around $700,000 a day.
Noble, the Geneva, Switzerland, driller, will roll out five new drill ships in 2013 and 2014. Noble recently announced agreements with Shell, including a three-year letter of intent for its Jim Day rig to work at about $530,000 a day, and the newer rigs could fetch more.
Diamond Offshore Drilling Inc. (DO), based in Houston, is seeking contracts for two of its four deep-water rigs under construction. Diamond may benefit by putting to work more of its so-called mid-water fleet, which operate in water less than 5,000-feet deep, at higher prices as the industry’s highest- rated rigs are sold out, Slorer wrote.
Some of the concerns about legal liability weighing on Transocean were cleared in January when a New Orleans district judge ruled that Transocean doesn’t have to pay compensatory damages in pollution-related economic loss lawsuits related to the BP oil spill.
The company still faces hundreds of claims by businesses and coastal property owners for potential punitive damages, as well as a suit brought by the U.S. claiming violations of federal pollution laws.
Transocean said Feb. 27 it’s set aside $1 billion to pay for potential spill claims, less than the $5 billion that had been priced into the stock, according to Bernstein’s Gruber.
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