Rig runner Transocean's (NYSE: RIG) got no taste -- for ordering new deepwater vessels on speculation, that is. This was just one of the reassuring points made during the driller's fourth-quarter conference call.
"Spec" newbuilds, such as the one ordered up by GlobalSantaFe in the fall, are a risky game. High-end floaters cost in the neighborhood of $750 million today, and the earliest delivery date is early 2011. If you're going to throw down for one of these monsters without a multiyear term contract in hand, your crystal ball had better be in fine working condition.
Transocean, which has since merged with GlobalSantaFe, continues to conservatively seek a minimum payback on newbuilds. This is key to understanding not only the driller's deepwater decisions, but its jackup game as well.
In a market with many small players willing to order jackups on spec, Transocean basically sees no opportunities for newbuild contracts that will meet the firm's payback criteria. So how about upgrading its already-existing jackup fleet? That doesn't look too likely either, at least for the decades-old rigs. The firm explained its recent sale of three jackups to Hercules Offshore (Nasdaq: HERO) by noting that the cost of upgrading this old iron wouldn't be all that much cheaper than ordering a new internationally competitive rig. In essence, don't expect Transocean's jackup fleet to get juiced up anytime soon.
As far as the firm's quarterly numbers go, this is about as complex as they'll ever get. Merger-related costs abound, and it's difficult to make comparisons with past results. Transocean did helpfully break out the legacy business's operating income, which topped $1 billion. That's pretty stunning compared to the third quarter's $750 million and change.
Transocean recently signed two big "forward start" deepwater contracts -- i.e., ones not beginning until current rigs roll off their current contracts in 2010 -- with Anadarko Petroleum (NYSE: APC). And, as is the case with Atwood Oceanics (NYSE: ATW), the firm's mid-water rigs are seeing strong interest from the likes of Nexen (NYSE: NXY) and Eni (NYSE: E). Factor in some deepwater newbuild contracts that Transocean expects to sign in the upcoming quarter, and you've got a tasty recipe for big gains ahead.
Related Foolishness:
- Last quarter, everyone was ogling Transocean.
- No more whining over Atwood, I promise.
- More on Hercules' mythic struggle.
