With the market for offshore rigs moving more and more toward newer, higher specification rigs, both Noble Corp (NYSE:NE) and Transocean (NYSE:RIG) needed to do something to turn over their fleets of older rigs such that they can compete with the newer fleets from Seadrill (NYSE:SDRL) and others. That is why Noble will be spinning some of its legacy fleet off into Paragon Offshore and Transocean will spin off some of its midwater rigs stationed in the North Sea into Caledonia Offshore. To help us better understand what these spinoffs will mean for each company, let's take a look at the fleets of these two, what they will look like post-spinoff, and how they stack up against the industry standard Seadrill.
Same name, new look
The goal of these two spinoffs is to shed both Transocean and Noble of parts of their legacy fleets so they can concentrate on marketing and operating newer, higher specification rigs. If this were the only thing that we were to look at, then it would look like Noble would be making the much better move of the two. In spinning off this new entity, Paragon, Noble will shed itself of 20 older jackup rigs and eight floating rigs. Although some of these rigs have had major rework, all of them are more than 30 years old and earn dayrates well below what higher spec rigs earn today.
Transocean, on the other hand, will only be letting go of eight of its midwater capable rigs that work in the North Sea. While these rigs are some of the oldest in Transoceans fleet, it is a rather modest spinoff considering that Transocean has 76 rigs on its books today and another 14 under construction. As you can see in this table, the move doesn't have nearly as significant an impact on the characteristics of the fleet as Noble's.
|Company||Average Age of Stationary fleet (Jackups)||% of Stationary Fleet Under 10 Years||Average Age of Floating fleet (Semi-Submersibles and Drillships)||% of Floating Fleet Under 10 Years|
|Noble Corp (Pre-spinoff)||29.2 years||14%||25.3 years||21%|
|Noble Corp (Post split)||15.5 years||58%||19.5 years||35%|
|Transocean (pre-spinoff)||11.5 years||36%||22.9 years||20%|
|Transocean (post-split)||11.5 years||36%||21.7 years||24.5%|
|Seadrill||4.8 years||97%||5.7 years||90%|
This may only seem like a material change, but it does have a profound impact on the profitability of each of these companies. Newer rigs that are capable of drilling to deeper depths and handling harsher environments garner much greater demand and higher rates. In the case for noble, the average rate for its jackup rigs will almost double to some of the best rates in the industry and its floating fleet will average dayrates 15% better than they are now. It will also see a significant uptick in the contract coverage for its fleet. While Noble will see a reduction in total revenue, the higher contract coverage and dayrates will mean better margins and will likely allow the company some more financial flexibility for construction of new rigs or returning a greater amount to shareholders.
Transocean will see a much less profound impact because of the smaller amount of rigs coming off the books, and these midwater floaters are actually earning a decent rate because of their location: the North Sea. In fact, since all but one of these rigs is contracted, it will actually negatively impact the fleet's contract coverage.
|Company||Contract Coverage of Stationary Fleet||Average Dayrate for Stationary Fleet||Contract Coverage of Floating Fleet||Average Dayrate for Floating Fleet|
|Noble Corp (Pre-spinoff)||73%||$95,000||71%||$400,500|
|Noble Corp (Post split)||92%||$185,000||89%||$456,500|
What a Fool believes
Looking at these moves, it looks that Noble has improved its fleet enough that it will be a much more intriguing investment than what it is today. Based on its contract coverage, dayrates, and shares of Noble trading at 9.27 times earnings after extra items compared to Transocean's 10.17, the case could be made that Noble is the better investment today. However, its fleets still don't quite hold a candle to Seadrill's, and that is why it is able to command dayrates for floaters $70,000 more than its biggest competitors. Overall, both Noble and Transocean still don't quite stack up with Seadrill, but Noble will be much closer following its spinoff than Transocean will.