Global offshore drilling giant Transocean Ltd. RIG has delayed the delivery and related payments for five new drilling rigs by nearly four years.
The company entered into a mutual agreement with rig builder Keppel Offshore & Marine's shipyard, Keppel FELS, to defer work on five class Super B 400 jackup rigs. From the beginning of the first quarter of 2020, the rigs will be delivered in two and three-month intervals.
The upstream companies had an optimistic outlook about industry growth in mid-2013, when oil prices had crossed the $100 per barrel mark. Hence, most of these firms heavily invested in exploration and production activities in the period. This resulted in increased drilling activities and thus, higher demand for the requisite equipments, which led to more bookings for drillers like Transocean.
In 2013, Transocean had awarded the $1.1 billion contract to Keppel for five new rigs, following delivery of two previous Super B Class units. The rigs were slated to be delivered between first-quarter 2016 and third-quarter 2017. The company also had options for a five similar units.
Crude oil price, however, has plunged about 70% from its peak levels of above $100 per barrel mark and has kept sliding since Jun 2014 to the current level of around $35 per barrel. This decline in commodity prices is primarily attributable to a supply glut in the face of lackluster global demand.
Transocean, like most of companies in the offshore rig market, has been adversely affected by the oil price collapse. This is because the top energy firms have curtailed drilling, which in turn has made the market unsupportive for sustained demand for drilling rigs.
Hence, preserving cash and maintaining financial flexibility are currently the prime concerns for the majority of energy sector players. Transocean, like several of its peers, has deferred rig delivery to preserve cash and to survive in this challenging environment.
Recently, Moody's Investors Service downgraded its credit ratings for Transocean amid concerns about the company’s increasing financial leverage due to weak dayrates and rig utilization across the market. It also said that the company had more rig construction projects than many of its peers.
Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. Transocean's fleet is considered to be one of the most modern and versatile in the world due to its emphasis on technically demanding segments of the offshore drilling business.
Transocean currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Some better-ranked stocks in the oil and gas drilling sector are Diamond Offshore Drilling, Inc. DO, Independence Contract Drilling, Inc. ICD and Seadrill Partners LLC SDLP. All these stocks hold a Zacks Rank #2 (Buy).
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