Transocean sees long-term activity boost despite short-term coronavirus impact

The COVID-19 coronavirus disease could hurt offshore contract driller Transocean in the near term amid a decline in customer spending as oil demand sinks and crude oil prices fall, the company said Tuesday.

Still, long-term market fundamentals and a growing list of opportunities bode well for a healthy 2020, company executives said on an earnings call.

"I would be remiss not to acknowledge the risk of activity delays as a result of the coronavirus," President, CEO and Executive Director Jeremy Thigpen said on the Swiss driller's call. "Its near-term impact on oil demand and related effect on current oil prices impact our customers' cash flow, and therefore, can result in delays in timing of anticipated project awards and commencements."

But while acknowledging that the macro environment offers some challenges, Thigpen said that in the longer term, a "much more balanced market" will support the crude oil price. A higher crude oil price "should support and hopefully strengthen the recovery that we are already witnessing in the offshore market," Thigpen said.

The CEO noted in the company's earnings release that in 2019 utilization across Transocean's floating fleet improved for the first time in over five years, and day rates for high-specification ultra-deepwater assets increased 75% over the year.

"We believe that 2019 marked the beginning of the much-anticipated recovery in the offshore drilling industry," Thigpen said in the release.

The company noted that it is "virtually sold out" of its highest-specification assets in the Gulf of Mexico for the majority of 2020, and customers have contacted the company to bring additional rigs into the Gulf to meet demand. Thigpen anticipates day rates to rise due to the tight supply.

While demand outpaces active rigs, it would take day rates in the high $200s to low $300s for the company to reactivate stacked rigs, Roddie Mackenzie, Transocean's head of marketing, said during the earnings call. The company would only reactivate stacked rigs if contracts support them, Mackenzie said, and "we're really getting closer and closer to that point."

Contract term lengths are also widening as customers look to lock up assets due to incremental demand.

"We're looking at at least 30 prospects that are a year or longer," Mackenzie said. Activity is up, and "there's a lot of work out there that still unsatisfied," he added.

The Gulf of Mexico is not the only growth market for the company, Thigpen said.

"As our customers continue to realize the favorable economics offshore, we are witnessing a shift in focus towards the deepwater," he said. "The opportunities include greenfield development, tiebacks and exploration. In fact, some industry reports indicate deepwater exploration projects will outpace development in 2020 for the first time since 2014."

In the Caribbean, Transocean was awarded several contracts in Trinidad, and continued drilling success should lead to additional rigs.

Beyond Trinidad, multiple campaigns in Guyana continue pointing toward incremental demand, and Suriname offers the potential for the rig count to grow, Thigpen said. Brazil also provides opportunities, and demand is increasing in West Africa in Angola, Mozambique, Namibia and Nigeria.

"This bodes well for continued strengthening in utilization and, more importantly, day rates," the CEO said.

Meanwhile, in the harsh environment market, "the Norwegian North Sea continues its multiyear run of strength," Thigpen said. "In 2020, several new programs should keep the market fully utilized for the high-specification assets."