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Transocean July 2020 Fleet Status Report Analysis

Transocean (RIG) has just released its new fleet status report. The company’s stock has performed better than most of its peers as Transocean avoided restructuring in the near term thanks to available liquidity and strong backlog. However, the future is highly uncertain for the company so it is especially interesting to see what’s going on with Transocean’s rigs. Without further ado, let’s look at the key developments:

  1. Newbuild drillship Deepwater Atlas signed a conditional agreement with Beacon Offshore to drill the Shenandoah project in the U.S. Gulf of Mexico. This project needs a 20,000 psi well control system so Transocean will have to invest a significant amount of money in Deepwater Atlas just like it did in the case of the other newbuild drillship Deepwater Titan which is expected to work for Chevron (CVX) from Q4 2021 to Q4 2026 at a dayrate of $455,000. For Deepwater Atlas, Bassoe Offshore calculated a dayrate of $490,000. Please note that dayrates for Atlas and Titan are not comparable with dayrates for other drillships since the rigs are unique and demand a huge upfront investment from Transocean. Importantly, Transocean will not book the $250 million backlog from this contract until the final investment decision is made. Beacon Offshore is expected to make this decision before March 31, 2021. In addition, the rig experienced certain delays, so the timing of its delivery is not known at this point.
  2. The harsh-environment semi-sub Paul B. Loyd Jr. contract was terminated by Hurricane Energy. The rig was expected to work in the UK until October 2020 and then transfer to a contract with Chrysaor which is expected to keep the rig busy until August 2021.
  3. Drillship Deepwater Corcovado, which is on contract with Petrobras (PBR) until July 2021 at a dayrate of $181,000, will spend 23 days out of service in September 2020.
  4. Drillship Dhirubhai Deepwater KG1, which is on contract with Reliance until December 2020 at a dayrate of $127,000, will spend 17 days out of service in October 2020.
  5. Drillship Dhirubhai Deepwater KG2 will start its contract with Woodside in Myanmar in November 2020 at a dayrate of $125,000 and then transfer to the previously disclosed dayrate of $250,000. The rig is expected to finish its work in April 2021.

Transocean’s report does not look good in terms of near-term cash flow perspectives. While the potential work for Deepwater Atlas is a good development, the rig will require investments now while the cash flow will most likely start coming closer to the end of 2021. Meanwhile, termination of Paul B. Loyd Jr., out of service days for drillships and a decrease of dayrate for Dhirubhai Deepwater KG2 will have a negative impact on Transocean’s cash flows in 2020.

In addition, the company did not report any near-term contracts. Meanwhile, the contract for harsh-environment semi-sub Transocean Barents ends in September 2020 while harsh-environment semi-subs Transocean Leader and Transocean Arctic are expected to conclude their current contracts in July 2020. The latter rigs were originally built in the eighties so there is a reasonable doubt that they will be able to find new jobs in the current market environment.

There are contract roll-offs on the floater side as well, but they will happen in October 2020-December 2020 so there’s still time to find new opportunities for these rigs.

I maintain my opinion that Transocean has a material risk of restructuring although this won’t happen this year. The company will likely face decreased cash flows due to the negative impact of the pandemic while it will have to invest heavily in two newbuild rigs. The company’s balance sheet is in a challenging state, and Transocean will need an increase in contract activity to keep its current working rigs busy.

From a practical point of view, Transocean remains a volatile stock for trading. Long term, the company is very speculative due to restructuring risks, although restructuring is not a certain outcome unlike in cases of some of the company’s peers. If you have questions about how the fundamental thesis helps practical trading, please read this article about Valaris (VAL) where I discussed this issue.

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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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.

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