Transocean (NYSE: RIG) is finally making a big move to get rid of shallow water drilling rigs to focus on the ultra-deepwater market that is driving the industry. In a deal announced yesterday, the company said it was selling 38 shallow water drilling rigs to Shelf Drilling International for $1.05 billion. Transocean will be paid $855 million in cash and finance the rest of the sale price to the buyer.
The move is part of a strategy by Transocean to focus on newer rigs in deeper water where there is extremely high demand. Over the past year, long after the Deepwater Horizon accident, Transocean has underperformed rivals Seadrill (NYSE: SDRL) and Noble (NYSE: NE) who are also focusing on ultra-deepwater.
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The shallow water rigs that Transocean had in its inventory had a negative impact on results and now Transocean will be down to 92 rigs, 29 of which can operate in 7,500 feet of water or more. This focus on the most lucrative side of the market should help improve profitability and growth.
Shallow water's best days are over
The difference between companies focusing on shallow water and deep water couldn't be starker right now. Five of the rigs being sold are currently stacked, or out of service, and the industry has an oversupply of shallow water rigs, leading to losses at shallow water drillers. Hercules Offshore (Nasdaq: HERO) is a perfect example of the struggle. As you can see below, Hercules has been losing money and growing more slowly than Seadrill, a company leveraged to the deepwater market.
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The sale of assets by Transocean will leverage the company to ultra-deepwater drilling, which is a good thing right now. I like the move and think it can help get Transocean out of the funk it seems to be in.
However, Seadrill already has a sizable percentage of ultra-deepwater rigs. You can find out more about Seadrill, one of the top stocks in drilling, in our premium report on the company. It comes with a year of free updates and much more, so click here to see if the report is right for you.
