Seeking Alpha: Fixing Transocean Isn't Going To Be Easy

It's tough enough to operate in a deeply cyclical industry, but when management makes a series of strategic blunders that leaves the company in an noncompetitive position, you get the situation Transocean (NYSE:RIG) is facing today. By refusing to build rigs without contract coverage and prioritizing scale above all else, the company finds itself with a large, outdated, and difficult-to-market fleet that has sizable day-to-day maintenance costs, whether the rigs work or not. Making matters worse, the drillers seem to be looking for any twitch in oil prices as an excuse to hold off on scrapping idle rigs.

Unless there is a dramatic increase in oil prices before year-end or a sustained above-average level of scrapping, the rig market may not come back into balance for two or three years (if not longer). Transocean is probably undervalued as a going concern, and I believe the new CEO's pedigree speaks well to the likelihood of operating improvements, but the company is going to burn through a lot of liquidity, and it's likely going to be hard road for a number of years.

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Fixing Transocean Isn't Going To Be Easy

Investopedia: Transocean Still Has Plenty To Prove, But The Valuation Isn't Demanding

It doesn't seem like it was that long ago when Transocean (NYSE:RIG) was considered one of the best-run energy-related companies and the leader in the offshore drilling industry. While Transocean still has far and away the largest offshore fleet, the company's issues with downtime, operational efficiency, and legacy Macondo liabilities has eroded a lot of the goodwill the company had built with the Street. Transocean's valuation doesn't appear very demanding today, and an improving deepwater market should help, but management still has to rebuild its credibility if the stock is to get the sort of valuation it used to enjoy.

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Investopedia: Seadrill Has What Big Oil Badly Needs

For investors who want to go full throttle into offshore energy exploration, Seadrill (NYSE:SDRL) is hard to beat. This company has quite a lot of debt and sizable spending commitments to shipyards (for new rigs), as well as a fairly complicated corporate structure. But Seadrill also has one of the best, newest fleets on the water and commitments from major oil and gas companies that should lock in favorable profits for years to come.

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Investopedia: Will Seadrill's Aggressiveness Pay Off?

There are a lot of energy industry veterans who believe that only the conservative survive, and it's not hard to see where they're coming from - companies that have levered up and expanded aggressively during booms have often been the ones to go bankrupt during the inevitable busts. Seadrill (NYSE:SDRL) is hoping to blaze a new trail, though, and the company's large new fleet should reap the best of what this upsurge in offshore drilling activity has to offer.

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Seeking Alpha:Can Transocean Send Its Problems To The Bottom Of The Sea?

Once considered the best offshore drilling company, if not one of the best energy-related companies overall, Transocean (RIG) has had quite the run of trouble over the last two years. Not only is Transocean still involved in the Macondo disaster mess with BP, but the company has had some very un-Transocean-like operating issues including significant unscheduled downtime.

Recent results suggest that these problems are largely behind the company. What's more, dayrates seem to be getting pretty healthy again. Though Transocean shares are already well off their late 2011/early 2012 bottom, growing EBITDA and improving investor sentiment could lift these shares higher still.

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Can Transocean Send Its Problems To The Bottom Of The Sea?

Investopedia: What Is DryShips Worth With Suffering Shipping Business

Every so often, investors will find valuation anomalies in the market. DryShips (Nasdaq:DRYS) looks like a good example today, as the company's stake in Ocean Rig (Nadsaq:ORIG) is actually worth more than the company's present market capitalization. Although the shipping industry is indeed struggling, and no fast turnaround looks likely, any estimation above zero means the core DryShips operations are undervalued.

A Tough Quarter, As Expected  
Nobody expected a great quarter from DryShips, or at least not insofar as the drybulk and tanker operations were concerned. Net voyage revenue for shipping was down 23%, as the company saw a 4% decline in voyage days and a 20% decline in contract rates. By comparison, the majority-owned Ocean Rig drilling subsidiary saw revenue more than double for the quarter.

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Investopedia: Seadrill - The Driller For Mad Dogs And Englishmen

Investors in stocks like Transocean (NYSE:RIG) or Diamond Offshore (NYSE:DO) might not be feeling the love yet, but the offshore drilling market is actually starting to get better. With a very modern fleet, aggressive leverage and a healthy dollop of devil-may-care operating philosophy, Seadrill (NYSE:SDRL) is ready for that turn. The question for investors, though, is whether they can handle the risk and valuation that comes with arguably the most aggressive player in a highly cyclical sector.

A Ho-Hum Third Quarter  
The markets are still expecting the offshore drilling market to be more of a 2012 event, so Seadrill's third quarter earnings are not likely to be examined quite so closely. Revenue was okay, falling 4% from last year and rising 3% from the second quarter. Rates were not all that incredible this quarter, but utilization was quite good and the company is bringing more of its rigs under contract.

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Investopedia: Transocean Has Value, But Badly Needs Growth

Feel free to start performing, Transocean (NYSE: RIG); we're all waiting on you. While Transocean often finds itself in lists of top energy service ideas, the company's five straight missed quarters are making it harder and harder to stay optimistic on this leading offshore driller. Although the long-term fundamentals for offshore exploration are indeed strong and Transocean shares look like a value stock, investors will have to be patient here, as management must not only rebuild performance, but rebuild Wall Street's trust as well. (To know more about value investments, read: 5 Must-Have Metrics For Value Investor.)

A Miserable Third Quarter 

If there was good news in Transocean's third quarter report, it was pretty much limited to the absence of any kraken attacks on the company's equipment. Revenue fell 4% from the second quarter, and 3% from last year, on lower utilization rates caused by downtime issues. Although rates are not terrible, the company had the worst performance in its highest-margin segments.

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Investopedia: Transocean Puts Billions To Work

Lately, one of the concerns around offshore drilling specialist Transocean (NYSE:RIG) was what it was going to do with its balance sheet. Institutional investors don't generally appreciate under-exploited opportunities and there seemed to be a general sense that Transocean management needed to get a little more active. With Monday's announcement, those concerns seem to have abated for the time being.


The Deal  
Transocean announced that it had reached a deal to acquire Norway's Aker Drilling for $1.43 billion in cash. Transocean valued Aker at NOK 26.50, a 62% premium to the prior close. Aker also has debt on its balance sheet, so the actual deal value is more in the neighborhood of $2.23 billion (net debt of $0.80 billion).

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Investopedia: Noble's Permit No Giant Leap For Drillers

In what may pass for a step back toward normalcy, the U.S. government has given Noble Energy (NYSE:NBL) the go-ahead to resume offshore drilling in the Gulf of Mexico. While it seems likely that a lot will be made of this move, investors should remember that it isn't a straight line between this permit and "normal", even if the long-term result is almost certainly going to be a return to active drilling. 

What Noble Energy Can Do
Noble did not receive permission to sink a new well. Rather, the company was granted permission to resume work on a well in the Mississippi Canyon, some 70 or miles south of Louisiana. Work on this well had started a while back, but all drilling was stopped in the aftermath of the BP (NYSE:BP) Deepwater Horizon accident.

Now, though, Ensco (NYSE:ESV) can go ahead and drill the well. As part of this process, Noble/Ensco will be using a new underwater containment system developed by Helix Energy (NYSE:HLX). It is unclear at this point whether the inclusion of that system had any bearing on Noble getting permission to move forward, but it certainly seems like a good move to include a system that should help contain any spilled oil if another accident were to occur. 


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Investopedia: Ensco Digs Deep To Go Deep

Mergers and acquisitions seem to pick up when a market is just turning, so Monday's deal between Ensco (NYSE:ESV) and Pride (NYSE:PDE) may be a good sign that the offshore drilling market is about to enter another cyclical upswing. By the same token, it could just be a sign that Ensco realizes that its tough to get fair treatment from major integrated energy companies as a smaller company and that scale can produce some inherent advantages. 

The Terms of the DealWith the deal announced Monday, Ensco will acquire Pride with a combination of cash and stock worth $41.60 per share. In addition to $15.60 in cash, Ensco will hand over 0.4778 shares of stock to complete the deal. That represents a 21% premium for Pride shareholders and a pretty healthy multiple for Pride relative to industry norms.

What the New Ensco will Look Like
When the deal is complete, Ensco will control 74 rigs, with 21 that function in deepwater and ultra-deepwater. That will make Ensco the second-largest deepwater player, second to Transocean (NYSE:RIG). Ensco will also have 47 jackups in the fleet, with 27 good for drilling in depths in excess of 300 feet.

It is not all about the number of rigs, though. While companies like Diamond Offshore (NYSE:DO), Noble (NYSE:NE) and Transocean may have been historically more focused on deepwater assets, the new Ensco will have a newer fleet. Newer matters - newer rigs are often more powerful and more technologically advanced, and can allow drillers to do more in less time and complete complex jobs that older rigs may not be able to handle. That, in turn, often spells better dayrates.


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A Primer On Offshore Drilling

Offshore drilling is a simple concept, but a very difficult business. With much of the easily accessible on-shore oil and gas reserves already under development, energy companies have increasingly looked offshore to replenish their reserves and fulfill their production needs. Although there is ample oil and gas waiting below the seabed, it is not so easy to access. Operating under the water is a bit like operating in space – it is hostile to man and machine and requires specialized equipment and know-how. 

The offshore drilling industry is a multi-billion dollar per year enterprise. While leading players like Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO), Ensco (NYSE:ESV) and Noble (NYSE:NE) represent a significant percentage of the operating rigs, there are dozens of smaller players throughout the world and the market capitalization of the publicly-traded companies in the sector exceeds $50 billion. (Before jumping into this sector, learn how these companies make their money in Oil And Gas Industry Primer.)

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Why Transocean Will Recover

There is no question whatsoever that these are very difficult days for Transocean (NYSE:RIG). Because of its role in the BP Gulf oil spill, the company finds itself under a microscope like never before, and it seems reasonable to assume that its is going to be facing legal trouble for years to come. All of this has taken a toll on the stock, which is now discounted based on the assumption of a very bleak future for the world's leading deep water driller. 

But not so fast. Even if Transocean bears a larger share of responsibility for the oil spill, I don't think this affects the company's potential in the long term. For better or worse, deep water drilling is here to stay. Plus, Transocean is a leading operator in the field, and it would take years for another company to build a fleet that could rival Transocean's. To me, this means the company has above-average odds of recovering from this matter.


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All Clear In Energy Services?

Here is the latest article of mine on Investopedia. I should note that there was a bit of a holdup in the editing process, so this may read as slightly dated. The basic themes in the piece are still very much relevant and timely, though, so I hope you find it interesting.

http://stocks.investopedia.com/stock-analysis/2010/All-Clear-In-Energy-Services-SLB-DO-ESV-HAL-WFT0428.aspx

The last few quarters have not been the easiest for energy services sector, as troubles in Mexico, lower activity in the Gulf, weather difficulties, and project delays have all led to lower demand and lower prices. Still, it was not as though the sector closed up shop, as many U.S. natural gas shale play are economical below the $4 natural gas price level.

On a more positive note, it looks like the operating conditions may be about to turn. The earnings and commentary we have seen from the past week was supportive, and should give fundamentally-inclined investors a bit more evidence that the turn in the business is real. 

For the rest of the article: 
  http://stocks.investopedia.com/stock-analysis/2010/All-Clear-In-Energy-Services-SLB-DO-ESV-HAL-WFT0428.aspx