There's Nothing Treacherous in Transocean's Path

This time last year, I was lauding Transocean's (NYSE: RIG  ) aversion to ordering new rigs on "spec." As the tender process for new drilling commitments slows to a crawl, that reluctance to over-order new vessels has proven extremely pragmatic.

So far, the brunt of the offshore drilling slowdown has hit the shallow and mid-water areas of the world, in which less well-capitalized independent operators (as opposed to investment-grade majors and supermajors) are significant players. One client, Oilexco, went bust, leaving Transocean with no choice but to write off $17 million of related bad debts in the fourth quarter.

In total, the firm has seen around $300 million disappear out of backlog "due to credit related terminations." In other words, the backlog now stands at $38.7 billion, rather than an even $39 billion, and non-investment grade clients only account for a 6% slice of that pie. I really appreciate the new breakdown along client credit quality lines in Transocean's quarterly slides. It definitely beats eyeballing the rig fleet status reports.

If you want something to worry about -- and I'm not sure there's any reason to -- it would have to be the rate of new contract signings, rather than an imploding backlog. Transocean's turnkey drilling business, called ADTI, has dropped from 11 simultaneous operations at one point in 2008 to just one today. This stand-alone business unit, inherited in the GlobalSantaFe merger, drills to a guaranteed depth at a fixed price, sometimes using the rigs of Transocean competitors like Ensco (NYSE: ESV  ) and Pride International (NYSE: PDE  ) . ADTI took a writedown north of $200 million in the quarter, wiping out all of the associated goodwill and most of the intangibles like trade name and customer relationships.

Of course, jackup drilling is small potatoes compared to the deepwater business. Here, too, there's something of a lull in contract signings. As long as Petrobras (NYSE: PBR  ) and other heavyweights keep up their long-term programs, however, Transocean should face calm seas relative to shallow water dwellers like Hercules Offshore (Nasdaq: HERO  ) .