Tough Times, Even for Transocean

For the second quarter, Transocean (NYSE:RIG) reported revenue of $2.88 billion, marking a nearly 8% sequential decrease. The contract driller saw revenue declines across every offshore rig category, from mighty high-specification floaters to lowly jackups. You have to look to the sub-category of harsh environment floaters, such as the ones working for StatoilHydro (NYSE:STO) and BP (NYSE:BP) in the North Sea, to see a sequential increase -- and only by a hair.

In case you hadn't heard, there's a serious drilling downturn under way. That explains why Transocean is seeing its fleet utilization drop alongside peers like Ensco International (NYSE:ESV). The fleetwide figure fell to 84% this quarter, while high-specification (i.e. newer and more capable) jackups registered the most noticeable sequential slide, from 99% utilization to 87%. With only 10 rigs in that category, the utilization measure can swing fiercely if even a single rig is idled, as was the case with the GSF Galaxy II this spring.

By fairly aggressively stacking jackups amid an oversupplied market, Transocean does benefit from lower operating costs. These were outweighed in the quarter by shipyard and maintenance work, however. Combined with newbuild costs, these shipyard projects took operating and maintenance expenses 9% higher for the quarter.

The shallow water market is looking rather ugly. As I've feared for some time, the wave of freshly built jackups hitting the water this year is putting some real pressure on the contract drillers. That's why I picked Core Laboratories (NYSE:CLB) as my best stock for 2009, rather than Ensco, Noble (NYSE:NE), or Transocean. As it turns out, all four are up handsomely on the year, but consider Transocean's warning on the jackup front. With dozens more uncontracted newbuilds arriving through next year, it's going to be a while before fundamentals are favorable again.

As far as the deepwater, Transocean remains optimistic. It should be, after signing that sweet contract with Petrobras (NYSE:PBR) last month. There is a notable bifurcation going on here, however. While there are several more Brazilian tenders expected in the months ahead, and talks are gaining momentum in places like India, most of the current demand is for ultra-deepwater work. According to Transocean's classification, that means at least 7,500 feet of rated water depth. This potentially leaves somewhat less capable rigs like the Sedco 709 and the Transocean Rather high and dry as they roll off contract later this year.

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