Transocean (NYSE:RIG) is the world's largest offshore drilling contractor. Its rigs and employees are contracted out for drilling operations in more or less every major offshore oil-producing region. Despite its long history and global reach, Transocean has continued to struggle as oil producers continue to cut spending budgets in reaction to the oil downturn. It's worth noting that despite its current travails, which have sent its stock to all-time lows, Transocean has weathered the current oil downturn better than many of its peers, some of which have sought Chapter 11 bankruptcy protection (such as Ocean Rig UDW, which filed in March 2017).
With Transocean adapting to the current downturn as best as it can, there might be clues as to how the company might emerge from the oil crisis. Read on for an overview of Transocean's history and what it says about the company's future.
A history of offshore innovation
In 1950, Southern Natural Gas Company acquired one of the first major offshore drilling enterprises in the United States. The subsidiary officially incorporated in 1953 and was named, appropriately enough, The Offshore Company. It was through Offshore that the country's first relocatable offshore drilling rig was put into operation the next year. The venture was successful, and Southern Natural Gas spun it off under the moniker of Sonat Drilling in 1993.
The next step in Transocean's maturation occurred in 1996. Transocean ASA, originally a Norwegian whaling company, merged with The Offshore Company, creating Transocean Offshore. Three years later, Transocean merged with Sedco Forex, the offshore drilling arm of Schlumberger, in a $3.2 billion transaction. And it didn't stop there. In 2001, Transocean acquired R&B Falcon Corporation in a deal valued at $8.8 billion that brought its fleet of rigs to over 200. Six years later, it merged with GlobalSantaFe Corporation in a $53 billion deal. The merger with GlobalSantaFe coincided with a major oil bull market, one that saw a barrel of crude at over $130 per barrel. Other than the current oil industry downturn, this time period arguably had the greatest effect on the company's stock.
The merger with GlobalSantaFe was a complicated transaction. Structured as a merger (as opposed to an acquisition), it also involved one-time cash payouts to each of the company's shareholder groups. Transocean shareholders received $33.03 in cash and 0.6996 shares of the combined company per Transocean share. GlobalSantaFe shareholders got $22.46 in cash and 0.4757 shares of the combined company. The merger yielded an offshore drilling enterprise with a contract backlog of $33 billion and 20,000 employees -- a far cry from the company's current headcount of 5,400. Lastly, it should be noted that, fueled by surging demand for it services, Transocean's shares continued to rise until encountering the 2008 financial crisis.
Clearly, Transocean's history is one of expansion via acquisition. It has done so amid increasing usage of deepwater offshore drilling in recent decades.
Transocean has dealt with two major events in recent years. The first was the Deepwater Horizon disaster. At approximately 35,050 feet below the surface, Deepwater Horizon was the deepest well in history up to that time, an impressive accomplishment. There was just one problem: The manufacturing specifications of the Deepwater Horizon called for drilling depths of no more than 30,000 feet.
Confidence often leads to recklessness, and just before 10 a.m. on April 20, 2010, methane gas from a new well escaped into the Deepwater Horizon, where it ignited, leading to an enormous explosion that engulfed the platform and put 126 lives at immediate risk. Because the well wasn't capped after the explosion, oil began to seep into the Gulf of Mexico. It would continue to flow for 87 days. As part of its investigation, the U.S. Federal Government estimated 4.2 million barrels of oil spilled into the Gulf. However, BP argued in court that it was much lower and a judge eventually ruled that BP was responsible for the spilling of 3.1 million barrels.
Yet despite being the owner of the rig, Transocean avoided any major costs in the aftermath. BP, the main operator of Deepwater Horizon, believed that it was not wholly responsible and that contractors Transocean and Halliburton shared the blame. A judge rejected that view in 2014, citing BP's recklessness. The British oil major would spend over $28 billion in damages and cleanup costs. If nothing else, the accident serves as a testament to just how difficult deepwater drilling can be for companies in the oil industry.
More recently, Transocean has had to deal with the current oil market downturn. Its Q2 2017 earnings results featured a line item that's become common in recent years: asset writedowns. Transocean's sale of its jack-up fleet to Borr Drilling for $1.35 billion (versus its balance sheet value of of $2.95 billion), in addition to smaller asset sales, forced the company to write down a total of $1.7 billion. Ignoring the writedowns, Transocean did break even for the quarter, and the proceeds from the sales are being put to good use -- the repurchase of $1.34 billion of the company's long-term debt.
New contracts have been tough to come by since 2014 in the drilling industry, and Transocean reported no change in its contract backlog in Q2 2017. Which is probably why the company recently agreed to buy Norwegian rig owner Songa Offshore for $3.4 billion, including the assumption of debt. Songa brings with it a $4.1 billion contract backlog. The purchase marks the biggest offshore-drilling sector deal in three years. The addition of Songa's four harsh-environment, semisubmersible rigs is a strong positive for Transocean and in line with the company's history of opportunistic purchases. In fact, this isn't even the first time Transocean has made a Norwegian deepwater acquisition. In 2011, it purchased Aker Drilling, another owner of harsh-environment rigs.
When it made the Songa deal, Transocean saw its stock drop to its lowest level since it was spun off in 1993. But Transocean might just be getting a bargain in the $5.97-per-share offer. Before the announcement, Songa's shares were trading hands at 90% below their 2014 high.
Today, Transocean's stock not only trades at all-time lows, but it is a smaller company relative to its pre-financial-crisis state:
|Metric||FY 2009||FY 2016|
|Total assets||$36.44 billion||$26.89 billion|
|Total liabilities||$15.88 billion||$9.6 billion|
|Shareholder's equity||$21.38 billion||$14.2 billion|
|Total revenue||$11.44 billion||$4.16 billion|
|Year-end contract backlog||$31 billion||$11.7 billion|
|Average shares outstanding||321 million||367 million|
Should you own Transocean?
For those looking to invest in offshore contract drilling industry, Transocean's long history of operating in some of the harshest environments makes it a top choice. It has navigated the downturn better than many of its peers, continues to pay down debt, and is finally adding to its contract backlog, albeit by acquisition. If and when the oil recovery arrives, Transocean stock will inevitably benefit. However, offshore drilling is one of the costliest, and riskiest, ways to produce oil, and it requires much higher oil prices than currently prevail today. For this reason, only the most risk-tolerant investors should consider adding Transocean to their portfolios.