Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Transocean: Worth the Wait for a Turnaround?

An offshore rig at night. Courtesy of Wiki Commons

With 92 rigs either operational or under construction, Transocean (NYSE: RIG  ) is the largest publicly listed offshore rig operator in the world. But to the layperson, the company is often most associated with the Macondo incident, in which a Transocean rig operated by BP blew out thanks to a drilling accident on the surface. The result was the worst oil spill in U.S. history. To make things worse, in 2012 management cancelled its quarterly dividend payment due to a declining fleet-utilization rate. 

Since the Macondo incident, the company has been one of the biggest investors in new, state-of-the-art drillships. Transocean also seems to grasp the fact that the brightest future for offshore activity lies in previously untouched ultra-deepwater depths of more than 7,500 feet: Only one company currently has more ultra-deepwater drillships under construction than Transocean. Management is attempting to transform the company into a more ultra deepwater-focused name with a young fleet. But with several other excellent offshore operators, many of which already have their ducks in a row, is it worth waiting around for Transocean?

Source: Seadrill Investor Relations

Building many, replacing many
The most important thing one must understand about Transocean right now is this: The company is heavily modernizing its floaters, which are ships that operate at greater depths. Above we see that Transocean's average floater is about 23 years old -- much too old for an industry where operators are demanding safer, post 2010-built vessels. 

On the other side of the coin, however, Transocean now has nine drillships under construction, the latest of which will be operational by sometime in the second quarter of 2017. Seven of these nine already have secure contracts. Over the next few years. Transocean will also retire and stack, as needed, a good number of its older vessels. 

By 2015, Seadrill hopes to increase its net income margin by $800 million as a result of contracting newer ships at higher dayrates and retiring older ships, which command much lower dayrates. Of the $800 million in expected margin increases, $500 million will come from operational efficiencies alone.

Image courtesy of Skytruth

Late to the game
Going back to the chart above, it's clear that Transocean was a bit slow to adapt to the new reality: Both Seadrill (NYSE: SDRL  ) and Ensco (NYSE: ESV  ) were quicker to see a bifurcated market, where operators are demanding both newer and more ultra-deepwater-oriented rigs.

Is Transocean too late? Definitely not. The secular change toward deepwater drilling is a long-term one, with powerful forces behind it. By 2015 or 2016, many experts believe that demand for deepwater and ultra-deepwater rigs will overwhelm supply. By then, Transocean will be a leaner, more profitable company with a fleet that will be well suited for the new realities of the market. 

Bottom line
While Transocean is indeed turning its ship around, many retail investors may still be nervous about this one. After all, the company had to cancel its dividend once in the past few years. Right now, Transocean's generous 6.7% yield is 85% of earnings. Transocean could therefore be a nice middle ground between an aggressive Seadrill, which yields 10% but pays 100% of cash flow to shareholders and a conservative Ensco, which pays a smaller 5.5% yield, accounting for 53% of earnings. 

In any case, I believe that Transocean deserves a second look. Management is by no means too late to adapt to the new realities coming, and I believe that the company will ultimately be well suited to win in coming years.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3019323, ~/Articles/ArticleHandler.aspx, 8/31/2015 8:06:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Casey Hoerth

Casey is Fool contributor covering Energy companies, and sometimes dividend payers, in general. Follow me at

Today's Market

updated Moments ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
ESV $18.11 Up +0.28 +1.57%
Ensco CAPS Rating: ****
RIG $14.23 Up +0.64 +4.71%
Transocean CAPS Rating: ***
SDRL $8.04 Up +0.14 +1.77%
Seadrill CAPS Rating: ****