Please ensure Javascript is enabled for purposes of website accessibility

Transocean Sheds Unwanted Assets, Focuses on the Ultra-Deep

By Isac Simon – Updated Apr 7, 2017 at 11:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Swiss giant says goodbye to shallow-water drilling.

Offshore-drilling services major Transocean (NYSE: RIG) has announced that it's selling off 38 of its shallow-water drilling rigs for about $1.05 billion. With major drilling contractors distancing themselves from shallow-water drilling, investors should applaud Transocean's management for making a prudent call at just the right time.

The initial reaction to this piece of news might be some raised eyebrows. But it seems CEO Steven Newman clearly knows what he's up to. In simple terms, management has its eyes set on some solid long-term returns at the cost of sacrificing some mediocre short-term gains.

The clincher
So what was the catalyst for this sale? It's an opportunity to add a huge $7.6 billion as contract backlog. To put that into perspective, it's a substantial 33% addition to its existing $22.9 billion worth of backlog orders. Transocean has bagged 10-year drilling contracts that potentially require construction of four ultra-deepwater drillships. To adequately fund the estimated $3 billion capital expenditure, the company is also planning to issue debt of $1.5 billion.

Transocean isn't exactly debt-free. In fact, the latest issuance is over and above its $12.8 billion of existing debt. However, management has little to lose, as ultra-deepwater drilling looks here to stay.

The magic words: ultra-deepwater drilling
No prizes for guessing whose success story Transocean is trying to emulate. Last month, energy editor and fellow Fool Joel South analyzed Seadrill's (NYSE: SDRL) second quarter and discussed its outstanding prospects from growing demand for deepwater drilling coupled with rising oil prices. Transocean definitely has the potential and ability to replicate Seadrill's success. Besides, as Fool analyst Travis Hoium argued, shallow-water drilling has been a failure in the past 12 months. One needs only to take a look at the struggling Hercules Offshore (Nasdaq: HERO). Management at Transocean seems to have spotted that pretty fast.

That said, Transocean is no stranger to controversies. Since the Gulf of Mexico tragedy in 2010, the company has been courting trouble. The company is yet to reach a settlement with BP, and it's been involved in another spill with Chevron off the Brazilian coast.

Foolish bottom line
In spite of these troubles, I think management has made the right choice. Ultra-deepwater drilling should turn Transocean profitable, as it has with Seadrill. To find out how Seadrill did it, grab a copy of our premium report on the company. The report contains Seadrill's game plan and what to expect from the company looking forward. Get started!

Fool contributor Isac Simon owns no shares of the companies mentioned in this article. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services have recommended buying shares of Chevron and Seadrill. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Transocean Ltd. Stock Quote
Transocean Ltd.
$2.73 (10.08%) $0.25
SeaDrill Limited Stock Quote
SeaDrill Limited
Hercules Offshore, Inc. Stock Quote
Hercules Offshore, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.