Jul 2, 2021
[5 min Read]
Transocean Ltd. (NYSE: RIG) is a leading international provider of offshore contract drilling services for oil and gas wells. Their primary business to contract their drilling rigs and related equipment and work crews on a day-rate basis to drill oil and gas wells. Their drilling fleet of 27 ultra-deepwater floaters and 10 harsh environment floaters are mobile can be moved to new locations in response to customer demand.
Revenue: Contract drilling revenues increased in 2020 by 2% compared to 2019 due to numerous factors but were offset by the lower activity on the active fleet. For the past 3 years, revenues have been trending upwards at a steady rate. Revenues will continue to increase steadily as contracts continue to roll in and they have a contract backlog of approx. $8.1B which ultimately means $8.1B in cash, which will be able to sustain them for the next year or so. In addition, with day rates rising YoY, we can expect higher revenues in FY2022.
Expenses: Operation expenses have decreased YoY primarily due to the idle rigs therefore also leading to reduced personnel and maintenance costs than on active fleet. In this part of their business, they are lacking and have recently gone under debt restructuring, and I'm looking forward to seeing these changes reflected in the next few years.
Debt: In 2020, RIG's total debt was $7.8B and a significant decrease from 2019's value of $9.3B. Despite lowered debt YoY, this substantial level of debt is worse when compared to their market cap. Total debt, nearly twice the company's cap, indicates a high ratio and when comparing the market cap to EV, EV being 3x market cap often indicates the high debt level and small cash position. The comparable companies found in the chart have a debt to market cap ratios lower than RIG's, which can be due to numerous factors such as operational efficiency, better management, etc.
Drilling Market: The market for offshore drilling rigs and related services remains positive. Increased licensing activity indicates the increased interest as energy companies continue to explore and develop new prospects that is offered through RIG's services.
High-Specification Rigs: There's been an increase of high-specification rigs as these are often more modern and technologically advanced than other offshore fleets by operating in deeper water depths and other challenging environments. RIG has done well in accommodating this by acquiring and increasing the high-specification asset portfolio and disposing of their lower-specification assets.
Short-Term Outlook for Oil: With economic recovery because of post-pandemic reopening, we can expect a sustained improvement in oil prices which will only drive demand for RIG's services and therefore resulting in higher day-rate numbers and ultimately revenue numbers. Consequently, with reduced competitors and the increase in oil demand, these numbers should continue to steadily increase over the next several years.
Their current contract backlog drilling revenues may not be fully realized. With backlog of $8.1B worth (taken from December 2020), several factors can cause rig downtime or a suspension of operations. With a set number of days in the contract term, any downtime or suspension may cause the day rate to be reduced to 0 and ultimately have an effect on their annual revenues and financial position.
The company is highly dependent on oil and gas prices. RIG's business depends on the demand for their services depends on the oil and gas industry which is directly affected by prices in oil and gas. Since these prices are extremely volatile and can be affected by many factors such as a pandemic, policies and laws, and natural disasters. Low oil and gas prices can lower exploration and development services in which Transocean operates in, which will result in lower activity and have a direct effect on revenues.
While these are just a few of the contracts that have been awarded to them since their last annual filing, the securing of these new contracts, shows demand is still high and revenues will be steady this next year and allow them to continue operating until 2023 at the least. Most of these contracts secured involve their high-specification rigs, and the company restructuring their asset portfolio to meet the shift in demands shows their commitment to strategic operations and providing shareholder return.
Transocean Barents was awarded a two-well contract in Norway expected to start in February 2022.
Transocean Norge awarded a four-well contract expected to start in March 2022.
Petrobras has exercised a 680-day option in Brazil and an 815-day option for another drillship in Brazil
Shell awarded RIG with a one-well contract extension in Trinidad
Equinor awarded RIG with a one-well contract that started in April with a day rate of $294,000
For the comparable analysis, I found 7 companies of competition to Transocean. They are Valaris Limited (NYSE: VAL), Precision Drilling Corporation (NYSE:PDS), Marathon Oil Corp (NYSE:MRO), Nabors Industries (NYSE:NBR), Helmerich & Payne (NYSE:HP), Patterson-UTI Energy (NYSE:PTEN) and Independence Contract Drilling (NYSE:ICD).
EV/EBITDA - Using 2020's EBITDA value and the median EV/EBITDA from the comparable, I derive the base share price of $31.37 representing a 534% upside.
EV/SALES - I took an average 2021 revenue value from 11 analyst estimates and arrived at a share price of $23.67 representing a 378% upside.
P/B Ratio - The P/B ratio estimated that Transocean's fair value is $17.14 which would imply a 246% upside. This is the most “conservative” upside of the bunch.
P/S Ratio - The P/S ratio estimated that the company's fair value is trading at its current price of $4.95.
With earnings coming up later this month, I have high hopes that they will report a positive EPS especially since last quarter they were close to hitting the mark and I expect earnings to increase since then with the start of many contracts in between quarters. If they report a positive EPS next earnings, it would be their first FY2021 and I think will send the stock price up. Furthermore, I am most concerned with their highly leveraged balance sheet and would keep an eye out for how they improve their operational efficiency going forward.