Rig Glut Sinks Transocean

Jim Brown
 
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Transocean broke long term support this week as the number of available rigs rose sharply due to a more than 20% drop in global exploration budgets. The feast to famine cycle in the oil industry is very painful for Transocean with rigs out of service that rent for over $100,000 per day.

While the damage is not yet a disaster in the rig rental business we can see the tidal wave of excess rigs developing. The problem is not just the current rig fleet but the flood of new rigs scheduled to be completed in 2011. These rigs were commissioned in 2008 when oil prices were soaring. With a 3-year build cycle these will be coming online in 2011 and the demand cycle is not expected to heat up again until 2012-2013. Jud Bailey, an analyst for Jefferies & Co said rig rents are likely to fall 10-15% and stay down until demand for offshore drilling again surges.

When oil prices were moving over $100 and oil companies could not get a rig because of order backlogs the demand turned into a panic. Orders surged and shipbuilders started to work.

There is a flood of ultra-deepwater rigs scheduled for completion between now and the end of 2011 and 22 don't have contracts to drill. The most deepwater rigs out of work ever was three in 2004. Today there is only one UDW off rent. Going from 1 to 22 is a major step. In the last building cycle all the rigs being built already had long-term contracts.

New rigs being completed will have to compete for orders with existing rigs with experienced crews coming off existing projects. The speed with which oil prices rose in 2008 caused speculative rig orders to reach unprecedented levels. An analyst at CK Cooper in Dallas said rig rates could fall as much as 20%.

Jud Bailey said that Pride (PDE) and Ensco (ESV)tend to weather the storms of oversupply because their rigs are under long term contracts. Transocean and Diamond Offshore have the most spare capacity and could suffer the worst in a rig glut.

However, Transocean spokesman Guy Cantwell declined to comment on Bailey's assessment. VP Terry Bonno told investors on a recent conference call that conversations on four UDW rigs Transocean will have available in 2011 have been gaining momentum.

Transocean (RIG) shares have fallen -16% from their October highs. Diamond Offshore (DO) has fared better with only a 12% drop. Diamond has major support at $94. Initial support on RIG is $74 followed by strong support at $66.

Diamond Offshore Chart

Transocean Chart

Pride has more than doubled in value in 2009 with a steady but choppy move higher. Current support is around $29. Ensco has support at $39 and $33.

James Wicklund, CIO at Carlson Capital said investors should buy PDE/ESV now and RIG/DO in 2010 to capitalize on the next drilling cycle starting in 2011-2012. Noble Corp SVP said rig marketing today was a challenge because everyone was watching to see who would blink first. With rig rents slipping there is an urgency to lower prices but it could be a slippery slope that leaves the rig supplier locked into long term contracts just as prices start to rise again. Noble (NE) support is around $33.

Jim Brown

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