With its rig fleet being dramatically reconstituted and the number of the world's deepwater oil and gas venues increasing by leaps and bounds, Switzerland-based Transocean (NYSE:RIG) has checked in a with a solid third quarter. Beyond that, given the number of changes afoot in its fleet, the world's biggest offshore driller promises to bear watching for a number of quarters to come.
On a reported basis, the company actually suffered a net loss of $381 million, or $1.06 a share, compared with a loss of $32 million, or $0.10 per share, for the comparable quarter of 2011. But if you back out non-recurring items, primarily an $878 million charge related to the company's tossing in the towel on shallow-water drilling, the quarter's profit came to $1.37 a share, a whopping 73% higher than the consensus among the analysts who follow the company. You might say the company's beat was deafening.
It's informative to note that, among the analysts who were so far off the mark -- sometimes, when a company is changing its stripes dramatically and rapidly, even attempting estimates is folly for the Wall Streeters -- 10 rate Transocean a "Strong Buy," and 19 are calling it a "Buy." The rating from another 13 is a "Hold," and a single "Underperform" is figuratively bringing up the rear.
The effects of change
For the quarter, Transocean's utilization rate for "floaters" was 81%, the highest since the quarter before the company became involved in the Gulf of Mexico blowout of BP's (NYSE:BP) Macondo well in April 2010. The disaster, which cost the lives of 11 crewmen and the loss of the driller's Deepwater Horizon rig, continues to plague Transocean. Ongoing legal costs related to the tragic 4.9 million-barrel spill are expected to cost the company approximately $15 million-$20 million per quarter through at least next year, according to Gregory Cauthen, the company's interim CFO.
Transocean had become involved in another, but far smaller, spill in the Campo de Frade field offshore Brazil, where it had been working for Chevron (NYSE:CVX). As the quarter came to an end, the Brazilian government announced that an injunction that had been placed upon the drilling contractor, which had shut down the company's work in the country, had largely been removed. Only in the Frade field will it continue to be prevented from conducting operations.
Of more importance for the overall scope of the company, as the quarter wound down, Transocean announced a pair of major fleet-altering agreements. First, in mid-September, the company said it had reached an agreement to sell 38 shallow-water-drilling rigs. The buyers, which agreed to pay an effective price of about $1.05 billion, is Shelf Drilling International Holdings, a newly formed company that is owned by private equity investors and its management.
Later, Transocean said that it had been awarded 10-year contracts for the construction and operation of four newbuild dynamically positioned ultra-deepwater drillships by Royal Dutch Shell (NYSE:RDS.B). The aggregate cost for the four units, which will be constructed at the Daewoo Shipbuilding and Marine Engineering Co. in South Korea, will be about $3.0 billion.
The first of the rigs is expected to be delivered in mid-2015, with each of the other three anticipated to be commissioned at six-month intervals thereafter. All four of the drillships will be capable of operating in water depths of up to 12,000 feet , with a capability of drilling wells to 40,000 feet. Among the effects of the contracts will ultimately be an addition of about $7.6 billion, excluding mobilization, to Transocean's backlog.
During his company's post-release call, CEO Steven Newman noted the emerging growth in the world of offshore drilling and the commensurate effects on costs in the industry:
... [Sustained] high levels of global activity and the influx of approximately 53 new ultra-deepwater drillships and 90 premium jackups over the next several years is likely to result in accelerating cost inflation. We expect to see evidence of this in our operating and maintenance costs, which include increased labor expenses, reflecting competition for and retention of talent; the cost of training and deploying crews to man the new equipment; and in the cost of drilling equipment, spares and consumables, among others.
A Foolish takeaway
As one who once plugged away in the service of a predecessor company of Diamond Offshore (OTC:DO), one of Transocean's key rivals, I must admit to finding the pace of change in and the global expansion of the deepwater segment of contract drilling to be nothing short of astounding. As such, I urge Fools to consider adding representation of the group in their portfolios.
If you're at all interested in deepwater drilling in general and Transocean -- whose shares I gladly admit to owning --in particular, simply click here to add the company to My Watchlist.