Transocean Tweaks Its Fleet

Despite a quarter that saw a good deal of shipyard maintenance and upgrade activity, Transocean (NYSE: RIG) still delivered huge results for shareholders.

Even with a sequential pullback in fleet utilization from 91% to 87%, the offshore contract driller cranked out roughly flat operating revenue. Transocean has rising dayrates to thank for that cushion. Every category, save for the lowest of the low-quality rigs, saw sequential strengthening in its average daily take. Before we check out some other fleet tweaks, let's review a few contract highlights.

Italian explorer Eni (NYSE: E) has been busily rounding out its rig supply, signing on for two different Transocean rigs. One will be taken out from 2010 to 2012 at a rate of $565,000 per day. Even more eye-popping is Eni's agreement on the Deepwater Pathfinder, which it's taking out for a five-year stint in the Gulf of Mexico at a rate of $650,000 per day. That's one of the strongest rates ever signed.

Other notable contracts were a Petrobras (NYSE: PBR) newbuild deal, more notable for its duration than its dayrate, and a five-year extension with BP (NYSE: BP) at $580,000 a day. It's rather amazing that only a year ago, we were marveling at Transocean's 200K per day.

In addition to improvements to existing rigs, largely in preparation for new assignments, Transocean also sold some vessels in the quarter. The GSF Arctic II and IV will bring in $750 million in time, but seller financing delays those payments. The other divestiture will immediately bring in cash and go toward paying down Transocean's quickly shrinking debt.

That brings us to the fine dilemma of how to return excess cash to shareholders. This firm is rapidly approaching its comfort level in terms of debt as a proportion of backlog free cash flow, which now stands at $18 billion. No decision has been made yet, but I'd expect news on either a special dividend or, if the share price sags, a share repurchase program sometime in the back half of the year.