GS vs. GCAP: Which Stock Should Value Investors Buy Now?
Transocean Ltd. RIG recently announced its intention to retire four of its aging rigs —Deepwater Discovery, Deepwater Frontier, Deepwater Millennium and Songa Trym — amid continued offshore weakness. Post the announcement of its decision, the company’s shares have declined more than 3% to eventually close at $11.92 on Jun 15. In regard to this, the oilfield services player will book non-cash impairment charges of around $520 million, which will be reflected in its second-quarter results.
More on the Headlines
Though oil prices have been gaining strength of late, the deepwater/ultra-deepwater drilling industry — with its associated risks and steep costs — requires a far higher crude price to thrive. Thus, the Exploration and Production companies are focusing on low-cost shale drilling of land, especially in Texas and New Mexico, rather than the offshore markets.
Moreover, aggravating the issue, there has been an increase in rig supplies, with new builds entering the market. As such, the old rigs are getting scrapped as they no longer remain competitive among the newbuild drillships. With old contracts rolling off, the rigs either have to get stacked or accepted at much-reduced dayrates, thereby impacting revenues of the company. Therefore, the only option remaining with the company is to either stack them, bearing high reactivation costs or just scrap them.
Evidently, Transocean’s Deepwater Discovery built in 2000, has been stacked since March 2015. Likewise, Deepwater Frontier, established in 1999, is also stacked since November 2015. The company also stacked its Deepwater Millennium drillship — built in 1999 — since May 2016. The same is the case of Songa Trym — which had been added into Transocean’s portfolio as part of the acquisition of Norwegian contractor, Songa Offshore — that needs to get retired amid lack of contracts in the current scenario.
More Rigs to Head to the Scrapyard
Transocean has been facing pressure in its top line owing to lower contract drilling revenues from the deepwater and ultra-deepwater floaters amid reduced dayrates and weak utilization. Last September, Transocean retired six of its ultra-deepwater floaters that had been cold-stacked, booking $1.4 billion charge to cover the cost of the same. The latest retirement of the four rigs was actually quite inevitable, considering the challenging issues associated with stacking as well as the present bleak deepwater drilling scenario.
In fact, other aging deepwater drillships of the company, namely Discoverer Deep Seas, Discoverer Enterprise, Discoverer Spirit and GSF C.R. Luigs, all built during the period of 1999-2001, are at a high risk of getting retired in the near future. Moreover, Songa Delta and Songa Dee are also currently cold stacked and can get scrapped anytime in the future.
Transocean is not the only firm grappling with this problem of aging uncompetitive rigs. Reportedly, Ensco plc ESV and SeaDrill Limited SDRL own the highest number of rigs on their books, which are at risk of getting demolished. In fact, taking into consideration all the rigs built before 1990 that are no longer under contracts, around 300 aging rigs could eventually get dumped.
Road to Survival
The offshore drilling industry has been worst hit since the downturn. The space is witnessing intense competition, which further poses risk to their dayrates and utilization levels. While the industry is likely to gain momentum in the coming years on the back of rising crude strength, the drilling contracts should presently focus on strategically adapting to current market scenario successfully. Sector consolidation, adoption of superior technologies, new operational systems, optimization of the fleet by strategic sell offs and acquisition, seeking profitable collaborations, among other strategic strides will help the companies perform well in the current market scenario.
Zacks Rank and A Key Pick
Transocean currently carries a Zacks Rank #3 (Hold).
Transocean Ltd. Price
Transocean Ltd. Price | Transocean Ltd. Quote
Meanwhile, one can consider a better-ranked player within the same industry, namely Pioneer Energy Services Corporation PES, holding a Zacks Rank #2 (Buy). The company’s 2018 earnings are expected to increase 60% year over year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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