Transocean Cut to Junk Status

Offshore
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The situation over at Transocean right now appears extraordinarily challenging… my thoughts:


Running casing on the [I]Discoverer Clear Leader[/I], image © R. Almeida

Considering the 4.5 years of legal battles Transocean (NYSE:RIG) has facedsince the Deepwater Horizon tragedy, the involvement of activist investor Carl Icahn, and the now utterly abysmal offshore drilling market, the news in mid-February of then CEO Steven Newman’s abrupt departure wasn’t that big of a surprise. It did leave those of us standing on the sidelines wondering what was next however.

Transocean (NYSE:RIG), the world’s largest offshore drilling company will be reporting fourth quarter results on Thursday morning, but even before their earnings report was released, Moody’s downgraded Transocean’s senior note rating to junk status.

Why?

Nine of the company’s ultra-deepwater rigs including the [I]C.R. Luigs, Discoverer Spirit, GSF Jack Ryan, Deepwater Discovery, Deepwater Frontier, GSF Explorer, Deepwater Pathfinder[/I] and [I]Deepwater Expedition[/I] are currently out of work, while at least nine more ultra-deepwater rigs will be finishing up their contracts in 2015 – a number which doesn’t include the ultra-deepwater drillship [I]Discoverer Americas[/I]that sources tell gCaptain will be going off contract with Statoil in the next few months.

Losing their contract with Statoil will likely only keep the [I]Americas[/I] idle for a little while however, before she gets snatched back up by someone else under a new, yet much reduced day rate. A similar situation may be occurring with Transocean’s drillship [I]Deepwater Invictus, [/I]a rig that is currently earning $595,000 per day and is covered by a firm contract from BHP Billiton until 2017. A source tells gCaptain that she will likely be dropped by BHP Billiton and re-hired by Chevron under a much lower day-rate, while BHP signs up the [I]C.R. Luigs -[/I] a rig that is currently idle.

Using that same model of dumping expensive rig contracts and re-hiring, the contract for Transocean’s 6th Generation drillship [I]Discoverer Clear Leader (DCL)[/I][B][/B]could be in possible jeopardy as well. The DCL is on contract to Chevron until October 2018 at $590,000 per day and as a sister rig to the [I]Discoverer Americas,[/I] it’s certainly possible that Chevron will dump its current contract and sign up the [I]Discoverer Americas [/I]once she becomes available. I must state that this scenario is pure speculation at this point, however.

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[QUOTE=rob;155497]I must state that this scenario is pure speculation at this point, however.[/QUOTE]

Rob

you are saying that operators are going to exit contracts before their expiration in order to get equivalent rigs for significantly less but there must be penalties to these operators to pull the plug without justifiable cause? Certainly TO or any other drilling contractor will not let their clients just exit to save money…think of the precedent that would set for the entire industry?

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No matter how you look at it profitable well run companies in 2014 will be on their knees by the middle of 2015 due to the cash burn.
Its going to create the biggest crash and boom for sure and the highest oil price we have ever seen assuming there is not another gfc…

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It could be that the benefits for breaking contract early are more than any penalties that might be incurred

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There are significant financial penalties that run into the millions of dollars. However, if you can drop a 600k/day rig for a 400k/day one, within 2-3 months you will be covering that $ on savings alone. Add up a multi year contract…

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[QUOTE=The Commodore;155511]There are significant financial penalties that run into the millions of dollars. However, if you can drop a 600k/day rig for a 400k/day one, within 2-3 months you will be covering that $ on savings alone. Add up a multi year contract…[/QUOTE]

That’s exactly it.

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Guess who has a multiyear contract for a Transocean rig in the hope they can possibly go and do something off Alaska? Problem for them is they may not have too many other (appropriate) rig options (without another whole winterzation operation).

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[QUOTE=rob;155512]That’s exactly it.[/QUOTE]

So it would behoove TO to renegotiate their existing charters like a lender would allow a mortgage to be renegotiated provided the loan remain at that bank.

.

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600k a day rigs are tendering under 300 now…
Thats a $100 million a year cheaper

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[QUOTE=powerabout;155526]600k a day rigs are tendering under 300 now…
Thats a $100 million a year cheaper[/QUOTE]

Did you work that out in your head or did you use a calculator?

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This stuff happens all the time on a smaller scale, in principle. Cell phone “termination fee,” for example.

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I spent over an hour on the phone this morning listening to Transocean’s Q4 and Full-Year 2014 Results and they mentioned the topic of “contract integrity” but did not get into specifics on any of their particular rigs. When I tried to beep in and ask a question, they denied me… which makes me think that:

  1. Flatly didn’t want to field a question from the media, or

  2. knew what my question was going to be and didn’t want to answer it.

All the other folks on the call were financial analysts.

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The D. Enterprise ran over a few days on their last well and have officially put out cold stack schedule for employees that will be kept 20ish per 2 crews, and will be heading to cs shortly, and from what I have heard the DD3 is working it’s last well for BP.

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From my understanding the D. Merica will be layed up with the DEN here shortly. If they do get picked up by chevron or who ever if that’s the scenario on the white board; that would be great bc that boat will be coming back looking like a pirate ghost ship and there are a lot of guys needing jobs…

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I think is it becoming more and more apparent that when we were all agog at the huge orderbook for newbuild drillships back three years ago, we were seeing a major overbuilding underway. How many of us speculated that nearly new $650M ships would be delivered and not find work?

I really have to go back and relist all those ships still ordered but not yet delivered. I know TO has several coming but they are for Shell…

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Can’t speak for the Enterprise, but the DD3 will continue working for BP. That is straight from the horses mouth. I just left the DD3 today.

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Anyone who had been around for a few decades saw it.

In the 90’s it was cable layers. In the 80’s it was bulkers, and in the 70’s it was supertankers.

The only market segment that is reliably go-go seems to be cruise ships,(God help us!)

Shipping company executives can be such herd animals…

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[QUOTE=Bilgeman;157324]Anyone who had been around for a few decades saw it.

In the 90’s it was cable layers. In the 80’s it was bulkers, and in the 70’s it was supertankers.

The only market segment that is reliably go-go seems to be cruise ships,(God help us!)

Shipping company executives can be such herd animals…[/QUOTE]
along with the bankers, but what do they know?

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[QUOTE=powerabout;157451]along with the bankers, but what do they know?[/QUOTE]
The most important thing that the bankers know is that they are “too big to fail”…so when their speculations don’t meet expectations, they just twist the government’s arm and then get the taxpayer bailout.

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[QUOTE=c.captain;155500]Rob

you are saying that operators are going to exit contracts before their expiration in order to get equivalent rigs for significantly less but there must be penalties to these operators to pull the plug without justifiable cause? Certainly TO or any other drilling contractor will not let their clients just exit to save money…think of the precedent that would set for the entire industry?[/QUOTE]

I spent over 3 years working on a case where this happened.

2009 economy crashes. 2010 Macondo. Meanwhile Noble Jim Day is built in Singapore and towed to GOM. When rig is delivered for acceptance testing, Marathon Oil concludes it is upside down in its 4 year contract with Noble and drops rig, blaming “deficiencies” with rig and crew. Yet somehow “deficient” rig goes to work immediately for Shell, just at a lower rate.

The formula is simple and time tested: drop rig, hire lawyers, let them drag it out for a few years, pay a settlement that is less than what you would have owed anyway. Drilling contractors will ultimately give in and do business with the same company a few years later, because drillers always have weaker bargaining position.

You can absolutely bet other oil companies will do this if they can.

Nick