Of all the sub-industries within the oil and gas world, it's hard to find one that has been hit harder than offshore rig companies. Their ties to higher-cost oil and gas sources has led to many companies looking for production growth in lower-cost sources, and the actual rig market itself is in a transitionary period as a slew of new rigs come online. One company that has taken it on the chin pretty hard in this market is Transocean (RIG 0.32%), whose shares decline more than 75% since the beginning of 2014
Despite this dismal market performance, Transocean's management has some statements that suggest it is in a decent position to manage the downturn and reemerge as a strong player in the space. Here are five quotes from management that show how it's handling today's dismal market and how it's positioning itself for the future.
1. We're getting our financial house in order
One of the biggest fears for rig companies heading into this market downturn was their ability to balance the payment of its remaining newbuild program without compromising the balance sheet. As mentioned by newly appointed CFO Mark Mey, it has been able to find some wiggle room in its newbuild program to pay down debt and build a pretty sizable war chest to handle a long-term market slowdown.
we redeemed a 4.95% senior notes due in November of this year with a cash payment of $914 million. This early retirement was favorable from a cash flow perspective...After factoring in the repayment of our bonds discussed above, we currently hold cash and cash equivalents of $2.9 billion and available too is an undrawn $3 billion revolving credit facility, for a total of about $6 billion in liquidity.
With that much cash on the books today, Transocean has a current ratio of 2.32 times, which means that it has more than enough cash and short-term assets to handle and shorter-term liabilities that may be needed. Also, with that much cash on the books, Transocean does have the option of widdling down its $8 billion in long-term debt that could position it for an even stronger turnaround when the market for rigs rebounds.
2. Don't expect any moves related to Transocean Partners anytime soon
A major financing mechanism that has been used by Transocean and others in the space lately has been to drop partial ownership of rigs with long-term contracts in place into a partnership. This has helped inject cash into the parent company in exchange for a piece of that company's operating profits long term. Even though there are other rigs that are potential candidates to be dropped into Transocean's limited partnership Transocean Partners (NYSE: RIGP), Mey explained that it may not happen very soon.
As some of you may be aware, Partners celebrated its 1-year anniversary as a public company last week, and RIGP remains an important component of Transocean's financial structures and balance sheet flexibility. However, as many of you know, as current market conditions have deteriorated since late 2014, the value of the company's units have also declined to the point where the market does not currently support a transaction between Transocean and RIGP.
For these dropdown partnerships, the value of equity is an extremely valuable lever to raise capital. However, if share prices are too low, then the partnership would need to dilute shares too much to make it worth it and could compromise the distribution payments. This could be a bit if a catch-22. Without higher prices, no new rigs will be dropped down, but investors aren't going to be interested in buying the partnership and raise prices if it doesn't see any new rigs being dropped down.
3. We still see a lot of weakness in the overall market...
Of course, with the market for rigs as weak as it is, almost every investor would be looking for any signs of where the market is headed from here. According to Senior Vice President of Marketing Terry Bonno, Transocean doesn't see the cavalry on the horizon anytime soon.
We expect challenging conditions to prevail through 2016, negatively impacting rates and utilization for all class of rigs. Contracts are being early terminated, contributing to growing idle capacity, and drilling contractors are also more frequently competing with our customers as they are now subsidizing to market rate on farmed-out rigs.
You can look at this in two ways as an investor. Either this is a sign that management doesn't have confidence in the market and rigs will remain weak, or you can view this as management acting very prudent and preparing to find a way to be profitable in an extended down market.
4. ... But there are some opportunities out there
As bad as it is, though, there are still some opportunities out there to get contracts for rigs. According to Bonno, some of the more promising areas for offshore development are looking for work thanks to some recent discoveries and some opportunistic producers out there.
However, we are seeing the NOCs and the independents providing some term work, primarily in India, Australia, U.K. and Africa, taking advantage of the countercyclical opportunity to lock up capacity at very attractive rates. Our customers are also taking advantage of performing P&A and decommissioning work required by regulatory authorities. Additionally, recent discoveries in the U.S. Gulf of Mexico, Colombia, India and Guyana are increasing the likelihood that we may see incremental rig demand emerge from these regions in the medium term. We are also optimistic about the bidding rounds in Mexico and Brazil, opening up critical deepwater markets for future opportunities.
One region highlighted again on the call was offshore India, where Transocean expects another several rig tender offers coming from ONGC, India's national oil company. Compeititon for these will likely be fierce, but Transocean likes its chances.
5. We still see some fat to trim
Over the past several months, Transocean has been ripping the proverbial Band-Aid off by scrapping several of its older non-core rigs. It has been effective at reducing operational expenses on assets that weren't generating money. So far, it has retired about 20 of its older floating rigs, but according to CEO Jeremy Thigpen that number could get bigger:
And as we said on the call, we're going to continue to look at each assets as they roll off contract to see are these assets that we want to incur the cost of stacking, are they assets that we just want to -- we want to retire because we don't think they're going to be competitive going forward. I'd say, in total, we'd probably see maybe 10 to 15 assets in our fleet that we're carefully considering, but it just kind of depends on the market.
There are about 15 rigs on the company's books that are more than 30 years old and are considered less capable rigs, so the assumption is that these are the rigs that will be looked at. The only reason that these rigs have not been scrapped as of yet is in large part because several are still under contract, and the need to scrap them immediately certainly doesn't seem as pressing.
What a Fool believes
The past several months have brought a whirlwind of change to Transocean. The market for rigs has dealt it a pretty heavy blow, but lately management has been rather adept at adjusting to the new market environment. With loads of liquidity and a plan to turn over its fleet, Transocean appears to be in a much better position to manage the downturn than it did at the beginning of the year. That should bode well for investors who may be looking at options in the offshore market today.
