Transocean: Shares Stay Volatile While The Business Improves
New Contracts & Debt Refinancing Show That Transocean Is Still On Track
Summary
Volatility for shares of Transocean has continued, with shares down 15% over the last two weeks.
They recently broke the seal on 500k day rates with their contract extension for the Asgard drillship.
This week, they issued $1.8B of debt to refinance existing maturities, materially improving their balance sheet.
Q1 Earnings are scheduled for April 29, so we will get to hear an update from management in a couple weeks.
I still think the risk/reward for long-term investors in Transocean is skewed to the upside.
It’s almost been a year since I first wrote about Transocean RIG 0.00%↑, and there have been a couple recent news items that warrant an update on the company. I still think we are in for a long bull market for offshore oil services, but it looks like it will take more time for the bull cycle to be in full swing than I originally thought. As you probably know by now, I take a basket approach to the offshore oil services sector, but it’s very entertaining to watch the Twitter debate on which company in the sector will make the best investment over the next couple years.
In my opinion, Transocean has the best fleet and the best management in the sector. Some investors are hesitant about their leveraged balance sheet, but management has continued to take steps to address those concerns. Day rates have continued to grind higher, as evidenced by the recent contract for the Asgard drillship at $505,000 per day. Stocks in the offshore sector will continue to be volatile, but if you’re expecting a bull market for commodities like I am (particularly oil), I think the volatility is more likely to be on the upside over the next couple years. If I had to close my eyes until 2030, and I could only hold regular shares of one company in the deepwater sector, I would pick Transocean.
Stomach Churning Volatility
The volatility across the sector is a double edged sword. Admittedly, it’s more enjoyable when Transocean shares run more than 30% in two weeks like they did last July, versus watching shares get cut in half from the recent peak through February. Investors should understand that dynamic before buying shares, but that volatility does provide buying opportunities for investors that are bullish on Transocean’s longer term prospects.
Over the last couple weeks, we have seen a 15% pullback for shares. Your guess is as good as mine on the short term direction of shares, and it will be somewhat correlated with the price of oil, but I like the odds that shares will be higher by the end of 2024. If you can hold through the volatility for a couple years, I do think the risk/reward on Transocean shares looks very attractive at the current price, especially when you consider the trend for day rates and the improvement in their balance sheet.
Day Rates Trend Higher
They say a rising tide lifts all boats, and it looks to me like the trend for deepwater day rates will continue to be up and to the right. Transocean recently broke the seal on 500k day rates for this cycle, with a contract extension for the Asgard drillship for $505,000 per day. The contract starts in June, and runs for year through June 2025. The contract on the Skyros was also extended until December 2025 for a day rate of $400,000.
I think we will continue to see higher day rates for Transocean as their existing contracts roll off, but I am curious to see what happens with the rigs they have stacked. I have seen estimates of $75-100M on reactivation costs, and management has said that producers will have to pay for a large portion of the reactivation costs. I’m confident we will see reactivations over the next couple years, but trying to estimate contract terms (day rates and activation costs) is where things get murkier. As a shareholder, I’m happy with management’s contracting strategy, as well as their approach to the balance sheet.
The Balance Sheet Improvement Continues
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