Offshore-drilling services major Transocean (NYSE: RIG ) has announced that it's selling off 38 of its shallow-water drilling rigs for about $1.05 billion. With major drilling contractors distancing themselves from shallow-water drilling, investors should applaud Transocean's management for making a prudent call at just the right time.
The initial reaction to this piece of news might be some raised eyebrows. But it seems CEO Steven Newman clearly knows what he's up to. In simple terms, management has its eyes set on some solid long-term returns at the cost of sacrificing some mediocre short-term gains.
So what was the catalyst for this sale? It's an opportunity to add a huge $7.6 billion as contract backlog. To put that into perspective, it's a substantial 33% addition to its existing $22.9 billion worth of backlog orders. Transocean has bagged 10-year drilling contracts that potentially require construction of four ultra-deepwater drillships. To adequately fund the estimated $3 billion capital expenditure, the company is also planning to issue debt of $1.5 billion.
Transocean isn't exactly debt-free. In fact, the latest issuance is over and above its $12.8 billion of existing debt. However, management has little to lose, as ultra-deepwater drilling looks here to stay.
The magic words: ultra-deepwater drilling
No prizes for guessing whose success story Transocean is trying to emulate. Last month, energy editor and fellow Fool Joel South analyzed Seadrill's (NYSE: SDRL ) second quarter and discussed its outstanding prospects from growing demand for deepwater drilling coupled with rising oil prices. Transocean definitely has the potential and ability to replicate Seadrill's success. Besides, as Fool analyst Travis Hoium argued, shallow-water drilling has been a failure in the past 12 months. One needs only to take a look at the struggling Hercules Offshore (Nasdaq: HERO ) . Management at Transocean seems to have spotted that pretty fast.
That said, Transocean is no stranger to controversies. Since the Gulf of Mexico tragedy in 2010, the company has been courting trouble. The company is yet to reach a settlement with BP, and it's been involved in another spill with Chevron off the Brazilian coast.
Foolish bottom line
In spite of these troubles, I think management has made the right choice. Ultra-deepwater drilling should turn Transocean profitable, as it has with Seadrill. To find out how Seadrill did it, grab a copy of our premium report on the company. The report contains Seadrill's game plan and what to expect from the company looking forward. Get started!