EUR 850.00 For Business Accounts Only

Morningstar | Downward Pricing Pressure Continues for Transocean in Latest Fleet Status Report; FVE Unchanged

We are maintaining our fair value estimate for Transocean following mixed news from last week’s Fleet Status report and tepid fourth-quarter operating results. Transocean continues to possess one of the most impressive high-spec Deepwater and Harsh Environment fleets, adding 20 rigs following the close of the Ocean Rig and Songa acquisitions in 2018. Although utilization rates remain strong (above 80% for Harsh Environment rigs, which now account for about one-quarter of the company’s rig fleet) and Transocean has secured an enviable backlog of contracts in the offshore drilling sector, we have yet to see dayrates recover past the industry trough. Renegotiations with Equinor over dayrates for North Sea projects show mixed signals on pricing (a small decrease in dayrates for four contracts and a modest bump for one contract), implying it may be too soon to expect a rebound in pricing.

Revenue and normalized EBITDA (adjusting for impairment) were $3.0 billion and $1.1 billion, respectively, in 2018, with flat 0% growth in revenue and a decrease in EBITDA margin from 44% in 2017 to 36% in 2018. Management’s short-term guidance remains conservative for 2019, expecting another year of flat growth in the face of lower oil prices, however, it remains optimistic in the long run. We also remain optimistic in Transocean’s long-term ability to procure contracts given management’s indication of a breakeven below $50 per barrel ($40/bbl for certain high yielding sites), falling below our midcycle WTI estimate of $55/bbl.