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Transocean (RIG) to Retire 3 Drillships, Incur $580M Charge

Zacks Equity Research

Transocean Ltd. RIG recently announced plans to retire three ultra-deepwater floaters — Discoverer Enterprise, Discoverer Spirit and Discoverer Deep Seas — from its offshore drilling fleet. Following the move, it is expected to incur a non-cash impairment charge of around $580 million, which will be reflected in third-quarter 2019 results. The company has classified these rigs as “held for sale”.

These fifth-generation drillships were built in the time span of 1999-2001. With the recent addition of three rigs, the company presently has eight cold-stacked drillships. Notably, in July, the company announced the withdrawal of a sixth-generation rig to prioritize its seventh-generation rigs. This move confirms that the company has been taking necessary steps to enhance its fleet with modern and competitive rigs, while scrapping off old and incompetent drillships that are expected to make its operations technically more effective and efficient.

Notably, Transocean’s two big buyouts in 2018 — Songa and Ocean Rig — had bolstered the company’s offshore game to a considerable extent and boosted fleet size. However, Transocean had to sell couple of Ocean Rig’s drillships including Paros and Eirik Raude owing to high reactivation costs. Also, many of Ocean Rig’s drillships are currently stacked, involving stacking costs.

Charges related to the reactivation of the drillships and technical challenges to make these operational after a substantial break remain concerns. As the company is facing a tough time to find work for some of its high-specification rigs in the present oil-price environment, there can be more write-downs in the coming days.

Price Performance

Steinhausen, Switzerland-based Transocean has lost 28.7% year to date compared with 25.9% fall of the industry it belongs to.

Zacks Rank and Stocks to Consider

Currently, Transocean carries a Zacks Rank #3 (Hold). Some better-ranked players in the energy space are National Oilwell Varco, Inc. NOV, Dril-Quip, Inc. DRQ and NuStar Energy L.P. NS, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

National Oilwell’s 2019 earnings per share are expected to rise 75% year over year.

Dril-Quip’s 2019 earnings per share are expected to rise 131.8% year over year.

NuStar Energy’s third-quarter 2019 earnings per share are expected to gain more than 107% year over year.

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