What’s The Outlook Like For Transocean In 2019?
The last few years have proved challenging for offshore drilling major Transocean, which saw its day rates and contracting activity post significant declines. While things are likely to look up for the company over 2019, driven by a large number of planned offshore projects, the recent decline in oil prices and a continued oversupply of deepwater rigs could still prove a challenge. In this note, we take a brief look at what lies ahead for Transocean and the broader deepwater market in 2019.
We have also created an interactive dashboard analysis on the expected outlook for Transocean, which you can use to arrive at your own revenue and EPS estimates for Transocean
Offshore Activity Is Expected To Pick Up This Year
Big oil companies are likely to approve about 110 offshore projects this year, up from 96 projects in 2018 and 43 projects in 2016, according to Rystad Energy. While this is likely to increase demand for drilling rigs and drillships over the year, the market is still meaningfully oversupplied, with Wood Mackenzie analysts estimating that about 30% of deepwater rigs could remain idled this year. That said, Transocean should be well-poised to take advantage of the growing activity, as it has been upgrading its fleet, by scrapping older, less sophisticated rigs while taking advantage of the depressed market to acquire newer rigs. In September 2018, the company announced an agreement to acquire Ocean Rig in a cash-and-stock deal valued at about $2.7 billion. Ocean Rig has a fleet of 11 high-spec ultra-deepwater drillships (two of which are currently under construction) and two harsh environment semi-submersibles, which are currently much sought-after. Ocean Rig’s modern fleet, and its presence in important offshore markets including Brazil, West Africa, and Norway, could allow Transocean to better take advantage of an upturn in the market.
Transocean’s Dayrates And Utilization Could Improve
While Transocean’s day rates have taken a beating in recent years (Q3 ultra-deepwater rates declined to $341k from $449k in the year-ago period) the company noted that rates for ultra-deepwater drillships were likely to increase through 2019 and 2020. Contracting activity has also been picking up. In December, the company contracted a newbuild drillship to Chevron for five years in the Gulf of Mexico starting in the second half of 2021, adding a contract backlog of about $830 million.
Crude oil prices have declined by close to 40% over Q4 2018, driven by stronger supply and concerns of an economic downturn. However, it’s possible that prices could recover in the medium term amid potential production cuts by OPEC, Russia and several other producers early this year as well as weaker-than-expected production from existing shale wells in the United States. Moreover, as offshore and deepwater projects have long lifecycles, operators could push forward with investments to bolster their capacity over the long run after multiple years of subdued investments.