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Transocean, Ocean Rig deal short-term dilutive as new fleet mostly idled


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Transocean, Ocean Rig deal short-term dilutive as new fleet mostly idled

Analysts expect offshore drilling contractor Transocean Ltd. to see earnings per share decline in 2019 and 2020 as the acquisition of rig and drillship operator Ocean Rig UDW Inc. expands the company's fleet size, but offers only one rig contracted through the two-year period.

The $2.7 billion deal announced Sept. 4 boosts Switzerland-based Transocean's portfolio to 57 floaters, adding eight high-specification ultra-deepwater drillships, two harsh-environment semisubmersibles and two high-specification ultra-deepwater drillships currently under construction, positioning Transocean for a deepwater recovery that company president and CEO Jerry Thigpen said began more than a year ago.

Tudor Pickering Holt & Co. analysts agree that a positive inflection point is developing and CreditSights analysts said the acquired assets should allow Transocean to better capitalize on an expected improvement in ultra-deepwater floater markets.

Yet, at a cost of about $300 million per floater, which is considered favorable given the quality of the assets, analysts still question if the valuation metric is appropriate at this stage of the recovery, especially with only one rig contracted through 2020.

"Transocean's acquisition of Ocean Rig captures high quality assets at an attractive per rig price but nearly all the rigs are idle, elevating the deal risk," Bernstein analyst Colin Davies said in a Sept. 5 note.

Of the two harsh-environment semi-submersibles, only the Levi Eiriksson is under contract, while Eirik Raude is cold stacked, Thigpen said during a conference call following the deal announcement.

Further, only one drillship, Ocean Rig Skyros, is on long-term contract, while Ocean Rig Poseidon is contracted through early 2019. Drillships Ocean Rig Corcovado and Ocean Rig Mykonos are warm stacked, while the remainder of the fleet including Ocean Rig Apollo, Ocean Rig Athena, Ocean Rig Mylos, Ocean Rig Olympia and Ocean Rig Paros are cold stacked, he said.

The CreditSights analysts expect Transocean will aggressively bid these idle rigs in the coming quarters "given a desire to get them back to hot status and low expected reactivation costs," they said in an Sept. 5 note. Davies said the rigs are good, but re-contracting risk is elevated and requires a robust view of offshore drilling recovery to accept the dilution.

Despite the deal having a dilutive impact in the near term, "The economics of the deal are premised on a more substantial offshore drilling recovery beyond 2020," Davies said. "Accretion is highly dependent on these stacked rigs securing work at higher rig rates and utilization than those implied by both consensus and our own forecasts," he said.

Thigpen, trusting in an impending market recovery, reinforced Transocean's bullish outlook for high-spec ultra-deepwater demand over the coming 18 months, and was constructive on its ability to find work for the idle and newbuild rigs in Ocean Rig's fleet.

Leslie Cook, principal analyst for upstream supply chain at Wood Mackenzie, supports the view, "It is Wood Mackenzie's view that the premium ultra-deepwater drillship market has reached the bottom and rates for some of the highest-spec assets have the potential to double in the next couple years as active utilisation begins to tighten," she said in a Sept. 4 note.

Fleet aside, and despite the lack of high quality backlog akin to Transocean's previous Songa acquisition, Transocean has "the best backlog coverage in the industry," Davies said.

Transocean stock closed Sept. 4 trade on the NYSE down 81 cents, or 6.7%, at $11.30 per share.

Tudor Pickering Holt analysts in a Sept. 5 note said the reactive stock price decline "feels like folks employing a 'shoot-first, ask questions later' type mentality with respect to merits of this deal."

"This is a winning deal for Transocean, for Ocean Rig and for the industry," Cook said.

Bernstein analysts rate Transocean Market-Perform with a target price of $13 per share.