Transocean (RIG) offers offshores contract drilling services for oil and gas wells; it specializes in technically demanding regions of the world, with a particular focus on ultra-deepwater and harsh environment drilling, explains Michael Brush, editor of Brush Up on Stocks.

The company owns, or has a partial ownership interest in, a fleet of 37 mobile offshore drilling rigs, including 27 ultra-deepwater floaters and 10 harsh environment floaters. The company is building two ultra-deepwater drill ships.Its mobile offshore drilling fleet is versatile, consisting of drillships and semisubmersible floaters.

Its mobile offshore drilling units are designed to operate far from ports for extended periods of time. They have living quarters for the crews, a helicopter landing deck and storage space for drill pipe and supplies.

Revenue fell in the first quarter, but that’s not really relevant. What matters is the future. The company projects contract activity will pick up in the second half of this year, and it is already seeing signs of this around the world. Oil companies are restarting delayed projects and commencing new campaigns.

RIG customers include Royal Dutch Shell (RDS.A), Equinor ASA (EQNR) and Chevron (CVX). They account for around 70% of business.

 “We are encouraged by the increasing number of customer inquiries for both harsh-environment and ultra-deepwater projects,” says CEO Jeremy Thigpen. “We are optimistic that oil prices will remain constructive, driving an increase in contracting activity as we move through the year. As global oil inventories decline, prices are likely to push even higher. Most importantly, we believe our customers also subscribe to this view.”

Rig price trends are favorable. For context, at the end of 2019 ahead of the pandemic, rig day rates were in the $250,000 range, up from $135,000 to $140,000 at the beginning of 2019.

Recent RIG deals inked in the Gulf of Mexico were for day rates of $280,000. “This demonstrates both the tightening market in the Gulf of Mexico and Transocean's ability to command premium rates based upon our industry-leading assets and services,” says Thigpen.

At current trends in the Gulf of Mexico, with several projects starting late this year and in early 2022, the entire Gulf of Mexico fleet of rigs will be sold out later this year. “This is something that the industry hasn't even contemplated since 2014, and clearly supports a meaningful inflection in day rates from current levels,” says Thigpen.

“It's important to note that we are not only responding to more tenders, we are also engaging in far more direct negotiations, particularly with customers operating in the Gulf of Mexico.” Customers are requesting information on available assets in this region with an “urgency” not seen in quite some time.

“We believe we in the early stages of a sustained recovery for offshore drilling,” says Thigpen. “We're very encouraged by the improving macro environment and the ongoing conversations with our customers for opportunities emerging in the second half of 2021 and into 2022.”

The focus on carbon emissions may play a role in Gulf rig demand. Deepwater Gulf of Mexico has the lowest carbon intensity of any oil in the U.S.

Another bullish trend is industry consolidation, as seen in the recent merger of Pacific Drilling and Noble. Consolidation leads to less price competition. Merged companies tend to write off older rigs, taking them out of service.

“We believe we will continue to see further consolidation, which in turn could lead to more rig retirements in a more balanced market,” says Thigpen. “The stage is being set for a strong recovery in offshore drilling, with demand for rigs increasing and the marketable supply of rigs simultaneously decreasing. If the market plays out the way we currently think it will day rates should significantly increase as we move into 2022 and beyond.”

The company had contract backlog of $7.4 billion as of the end April 2021. That’s nice, but it is down sharply from the prior three years, suggesting room for improvement here, too.

Tactics: Off shore rig companies are huge cyclical plays. Consider buying now and adding on declines towards the $4.20 “strictly speaking” buy limit for conservative buyers.

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