You wouldn't necessarily know it from oil service stocks' day-to-day behavior, but the market for oil and gas drilling is still very tight. With little excess capacity in storage and long lead times on new builds, dayrates -- the industry term for prices -- keep climbing, and energy producers are increasingly willing to lock in long-term rates that are very profitable for the drilling companies.
As the world's largest contract drilling operator, Transocean (NYSE:RIG) certainly stands to benefit. Third-quarter revenue climbed 17% as average dayrates increased roughly 18% and utilization improved to 82% companywide. What's more, the company recently signed an agreement for the Discover Spirit in the Gulf of Mexico that will pay a dayrate of $475,000 -- a figure which I believe is the highest ever for a drilling rig.
Looking at some other bits and pieces, it seems that Transocean's market opportunity over the next few years is considerable. One-fourth of the company's high-spec floaters are under contract through 2010, and another 14 rigs will come off contract before 2007, giving the company the opportunity to reprice them at higher rates. In addition, while the company is getting some interest from customers on new builds, and there are some Norweigan outfits reportedly building new rigs on spec (meaning they're not under contract), new supply doesn't seem to be a major worry just yet.
You can find another expression of confidence in Transocean's board's recent authorization of a $2 billion share buyback. Although these announcements are always open-ended (meaning there's no obligation to complete them), that amount still represents more than 10% of the current market cap, and it's a powerful testament to what cash flows could look like over the next couple of years.
Whether it's BP (NYSE:BP), Anadarko (NYSE:APC), or Petrobras (NYSE:PBR), energy companies want to drill more, and they want to make sure they have access to offshore rigs. That's good news for Transocean and other offshore operators like GlobalSantaFe (NYSE:GSF) and Noble Corp (NYSE:NE). While Transocean will see some impact in the fourth quarter from hurricane repairs, and the long-term cash flow picture may be dicey, strong earnings and cash flow leverage over the next few years may yet power a further rise in the stock of this top-notch offshore operator.
For more from the Motley Fool drill team:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
