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Transocean Secures Twin Contracts Worth $241M From Petrobras

Zacks Equity Research

Transocean Ltd. RIG recently clinched twin contracts for its ultra-deepwater rigs from the Brazilian oil giant Petrobras (PBR). Post the announcement, shares of the offshore drilling powerhouse rose 6.54% to close the session at $8.63 on Mar 11.

Notably, the company secured contracts for two of its drillships, namely Mykonos and Corcovado, which was acquired as part of Ocean Rig buyout in December 2018. Both the rigs are set to commence operations offshore Brazil in November 2019. The deal further cements the company’s relationship with Petrobras, in turn boosting revenues.

Digging Inside the Dayrates

Importantly, the estimated backlog for 629-day Corcovado contract is $123 million, reflecting a dayrate of $195,548. The projected value for 550-day Mykonos award is $118 million, depicting a dayrate of $214,545. The Mykonos and Corcovado awards include priced options for 815 days and 680 days, respectively.

Notably, the dayrates for these contracts are lower than 2018 average dayrates for ultra-deepwater rigs of $356,700. The company still remains bogged down by reduced dayrates, which are limiting earnings. As it is, the company swung to a quarterly loss in the last reported quarter amid receding dayrates. The scenario is not likely to improve anytime soon, thereby impacting revenues of the firm.

While the company is bearing the brunt of lower dayrates, it is notching up contracts wins, translating into increased backlog, which is likely to offer some respite.

Industry-Leading Backlog Provides a Breather

Transocean, sitting atop a record backlog of $12.2 billion, is the largest provider of offshore contract drilling services. The acquisition of Songa and Ocean Rig bolstered the offshore game of the company to a considerable extent. The buyouts haveboosted Transocean’s long-term opportunities, helping the company penetrate into deep-and harsh-water markets more effectively.

With contracting activities picking up,Transocean is poised to capitalize on the gradual rise of offshore activities, as the company has been taking necessary steps to enhance its fleet with modern and competitive rigs, while scrapping off old and incompetent drillships.

While the dayrates remain a concern, activity upticks continue to aid the company. If the dayrates start picking up eventually in the medium term, the unparallel fleet of Transocean — a Zacks Rank #3 (Hold) company — will position it to capitalize on market recovery, which is expected to give a new lease of life to deepwater drilling very soon. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

Some better-ranked players from the same industry include YPF Sociedad Anonima YPF, Archrock, Inc. AROC and NuStar Energy L.P. NS, each carrying a Zacks Rank #2 (Buy).

YPF Sociedad delivered average positive earnings surprise of 210.38% in the trailing four quarters.

The 2019 Zacks Consensus Estimate for Archrock is 63 cents, representing 31.3% earnings per unit growth over 2018. Next year’s average forecast is 78 cents, pointing to another 23.8% growth.

The 2019 Zacks Consensus Estimate for NuStar is pegged at $1.10, representing 64.2% earnings per unit growth over 2018. Next year’s average forecast is $1.32, pointing toward another 20.3% growth.

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