Source: Transocean Ltd.
The offshore drilling industry has had its ups and downs of late. This week was no different as Transocean Ltd (RIG +4.14%) reported a very steep writedown of its goodwill and rig fleet while signaling that there were dark days yet ahead. However, on a more positive note ConocoPhillips (COP +2.17%) and its partners made another large oil discovery offshore Senegal. These stories show just how turbulent the offshore drilling industry continues to be for investors.
Transocean's rough quarter
Late last week Transocean surprised the offshore drilling world by announcing that it was delaying its third-quarter results after it planned to take a $2.76 billion impairment charge. That charge included a $1.97 billion non-cash charge related to goodwill, which wiped out about two-thirds of the company's $2.99 billion in goodwill on its balance sheet. In addition to that, the company took a $788 million writedown of the value of its rigs due to the "deterioration of the market outlook, reflecting the recent decline in dayrates and utilization for this particular asset class."
However, that wasn't the only bad news Transocean had for investors. On Monday the company announced its third-quarter report and those results were clouded by that writedown as well as lower revenue efficiency and an increase in out-of-service time for some of its rigs. CEO Steve Newman noted on the company's conference call that some of those assets, which are being "cold-stacked," are now likely candidates for retirement. If the company comes to the conclusion that the likelihood of an asset ever returning to the marketplace is remote, then the company is likely going to just scrap the rig. While this is a fate that all rigs will one day face, Transocean, which has one of the oldest rig fleets in the industry, could be forced to retire these rigs sooner rather than later, which means it will earn less money on the rigs than it would have if the industry wasn't in the middle of a downturn.
ConocoPhillips finds more oil offshore Senegal
ConocoPhillips offshore drilling exploration program has been the poster child of the offshore drilling industry's rough year as it seems to take one step back for every step forward. So far this year the company's most recent well results in the Gulf of Mexico and Angola have resulted in dry holes. However, this week the company is back to taking steps forward as it announced a second oil discovery offshore Senegal. This second discovery is in the SNE-1 well, which is located about 60 miles offshore Senegal and is noted on the following slide.
Source: ConocoPhillips.
ConocoPhillips actually hadn't completed drilling this second well when it announced the discovery as it had yet to reach the total planned depth of 10,000 feet. However, ConocoPhillips' partner and the operator of the well, Cairn Energy, noted that the partners have already encountered well over 100 feet of oil net pay, which are the hydrocarbon bearing rocks. The discovery could hold anywhere between 150 million barrels to upwards of 670 million barrels of recoverable oil. So, this has the potential to be a fairly decent sized oil discovery and could help to make up for the company's recent string of dry holes.
Investor takeaway
The offshore drilling sector continues to battle a big storm in the rig marketplace. That storm really had a noticeable impact on Transocean's quarter as it was forced to write down rigs and could end up retiring some of its rigs earlier than it had hoped. However, in the midst of the storm oil companies are still finding oil, which suggest that this storm will eventually pass as the world will always need a steady supply of oil, with offshore drilling being a key area where new discoveries will be made.
