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Gaston Lagaffe 12 november 2017 12:05

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Hoe is de stand van zaken in November ? Allereerst wil ik vermelden dan ik een positie in de volgende fondsen heb, dan wel wil opbouwen / uitbouwen : Transocean (RIG) - Fugro (FUR) - Seadrill Partners limited (SDLP) <> let op is geen Seadrill ! - Diamond Offshore (DO) - Rowan Companies PLC (RDC)

We zien dat het sentiment in de Olie-Offshore is verbeterd als gevolg van de gestegen olieprijs. Deze olieprijs dient langere tijd boven de $ 60 te blijven om een ommekeer in de Olie-Offshore te kunnen realiseren. De goede tijden zijn dus nog niet aangebroken, m.i. zal het op zijn vroegst 2019 worden voordat we van een normale markt zullen kunnen spreken.

Zoals we in diverse artikelen van Bassoe Offshore hebben kunnen lezen is de overcapaciteit bij de offshore-booreenheden (jack-ups / semi-subs / boorschepen) veel lager dan de markt denkt. Kort gezegd komt het hier op neer : booreenheden gebouwd voor 2000 welke cold-stacked zijn (zombie offshore rigs) zullen, uitzonderingen daar gelaten, nooit meer actief worden. De kosten voor het weer actief maken (o.a. nieuwe certificaten) zijn gewoonweg veel te hoog. Voor boorschepen moet je al snel rekenen op een bedrag tussen de $ 30 - $ 50 miljoen. Dit verdien je met een huur-dagprijs van $ 110/m - $ 150/m niet terug. Bij jack-ups liggen de cijfers iets gunstiger maar de problematiek is gelijk. Alleen solide drillers (RIG-DO-RDC) hebben de middelen om sommige cold-stacked eenheden te reactiveren.

Gaston Lagaffe 12 november 2017 13:00

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Zombie offshore rigs don’t threaten rig supply --- Bassoe Offshore ---

By: David Carter Shinn Nov 07, 2017

Some of them are walking dead, but old rigs aren’t coming back to get us.

One of the hottest issues in the offshore rig market is rig competitiveness. You see it in investor presentations as a key point to support companies with fleets of newer rigs, and most rig utilization tables filter out to some degree rigs that, according to the creators of these tables, just don’t matter to the supply side anymore.

We also apply reasoning that differentiates competitive supply from total supply to get a more realistic picture of utilization. And, as we pointed out in an article several months ago, the argument that old rigs (and poorly maintained new ones) make oversupply a moot point is valid to a large extent.

You can reasonably assume (as most owners of newer, high spec fleets do) that a significant number of the rigs in the offshore fleet are uncompetitive and destined to leave the market as they experience waning demand compared to new, well-maintained rigs and dayrates remain too low to justify capital-intensive upgrade projects.

We estimate this number to be nearly 340 rigs. If you take into account many of the newer UDW drillships which have been cold stacked for years now, the number could go up even higher.

While we’d like to see an acceleration in the rate of attrition, we’re confident that the trend of new rigs taking more demand from old rigs will continue.

Oversupply isn’t nearly as bad as it seems

All rig segments started experiencing “age-bifurcation” years ago. In 2013–2014, demand for new jackups continued to rise as demand for old rigs fell. This phenomenon wasn’t as pronounced in the semisub and drillship segments, but a decline in old-rig utilization happened (and is still happening) there too.

So even before the downturn, old rigs were on their way out. Once the downturn hit, many of them became zombie rigs as owners focused their resources on the better assets in their fleet (if they had any) or just stuck their heads in the sand and hoped the market would come back before it was too late to bring these assets out of some sort of suspended animation.

Now, the market is saturated with zombie rigs. Some of these are more obvious than others – for example, those that have questionable ownership (either taken over by a financial institution, a sovereign court system, or abandoned by their owners) or have been cold stacked so long that even the best engineers wouldn’t put someone else’s money into reactivating them. But other rigs have quietly, inconspicuously passed on into another (undead, unalive) dimension without the market being completely aware of it. Sometimes even their owners don’t know it’s happened.

Nobody knows exactly how many uncompetitive rigs exist. And as time goes by, more and more rigs will transform into assets without a future. Stacking costs are low enough to hide in most P&L statements, and reactivation costs can evade budgets until a company actually decides it’s going to attempt to put the rig back to work – which doesn’t happen too often.

Sometimes their owners suddenly announce that one or more of these rigs will be retired. Owners like Transocean, Diamond, and Noble have been good at this. Other owners have hesitated to swing the ax of attrition, but it doesn’t matter. At least for now, most old rigs don’t count toward competitive supply.

So competitive supply, while still too high for dayrates to start rising, isn’t really that high. As the market improves, as the oil price continues to break through recent highs, and as onshore/shale production efficiency falls, offshore drilling rig demand will eventually make a strong enough comeback to provide cash flow to owners with young fleets.

New rigs are taking over

Looking at each main segment of the fleet, it’s clear that old rigs are leaving us. They were old ten years ago, but now they’re on borrowed time if they’re drilling (and they’re already zombies if they’re not drilling).

The number of old jackups on contract has fallen by over 60% from its highs of 2009.

Semisub demand has developed in a similar way.

Drillships have different curves as UDW market came into existence recently, but there are only five old drillships on contract today – most of them have been scrapped.

The market still needs a controlled, gradual recovery

Owners of new rigs still have a challenge though: they'll have to survive on low dayrates until supply is completely reset and demand rises back toward historical averages. Dayrates for new rigs, even if they’re preferred by oil companies must remain low enough for long enough to ensure that some old rigs don’t become attractive upgrade targets and stay in the market.

But the market outlook hasn’t been better (apart from ultra deepwater) since 2014, and optimism is coming back quickly.

The only risk we see is that the market – or the market outlook – improves too quickly to render all old rigs uncompetitive and entices owners to try to bring back some of them from the dead.

So far, there’s little evidence that could happen as dayrates for jackups are in the $50,000-$70,000 range and drillships are at around $150,000. But the midwater harsh environment semisub segment, with relatively little real oversupply and rising dayrates, could have a higher old-rig reactivation risk. Owners of old jackups may also continue to put off scrapping. In both cases, the market effect is likely to be negligible.

The market is moving in the right direction, and if it does, we’ll see a modern global rig fleet with higher utilization and sustainable dayrates sometime during the next two to three years. In the meantime, we suggest that owners seek out zombie assets and give them the coup de grâce (just in case).

Gaston Lagaffe 12 november 2017 13:03

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Transocean: Positioning For A Turnaround --- Seeking Alpha ---
Nov. 8, 2017 , Josh Rudnik

RIG is bottoming.

Management is positioned for rising energy prices.

With oil prices now rising, RIG is set to move higher.

Transocean's (RIG) share price looks to be forming a significant bottoming pattern as oil prices begin to rise. RIG is trading near record lows, with management positioning for rising energy prices. Moreover, as energy prices do pick up, investor sentiment could soon begin to rise, leading to a reversal higher in its share price.

Price Action

The chart below is of RIG since its IPO. From the early 1990s until 2008, RIG moved significantly higher, with its share price rising as much as 1,300%. From the financial crisis to present however, RIG’s share price has collapsed backed to near record lows.

Declining oil prices, and the waning demand for offshore drilling have contributed to the company's decline, but even through it all, RIG has survived. Its share price looks to be forming a double bottom pattern, with an upside breakout above $11. Although RIG has a long way to go to recoup its previous losses for shareholders, management is positioning itself to take advantage of rising energy prices going forward.

Positioning For A Comeback

In its most recent earnings call, management discussed how RIG was updating its fleet, while also purging old supply. In August, RIG entered into an agreement to acquire Songa Offshore and its fleet of seven floaters, which includes four new harsh environment, high-specification Cat-D semisubmersibles. The Cat-D rigs were designed in collaboration with Statoil (STO), and are currently contracted to Statoil with a total backlog of approximately $4 billion, extending into 2024, according to the call.

The $4 billion in backlog does not include the follow-on multi-year options, which could potentially add an incremental 12 years of work for each of the four rigs. Management is especially excited about the transaction because it will add new harsh environment assets to its fleet in a target market with a strategic customer, while also adding to its industry-leading backlog, all of which should drive future revenue growth. This comes as many of its peers continue to struggle with solvency.

Additionally, management is also focusing on purging some of its older assets in an effort to assemble the strongest fleet in the industry. During the third quarter, RIG announced its intent to remove six additional assets from its fleet, including five ultra-deepwater assets, which were estimated to be challenged. The total number of rigs retired by the company over the last few years is up to 39, which has allowed RIG to cut costs, and better position for rising energy prices in the future.

Rising Oil Prices

With RIG surviving the most recent oil price downturn due to cost cutting, it is now better positioned to capitalize on rising prices going forward. Management drove down the cost of well delivery during the previous oil price collapse, helping to facilitate its customers' future investment in offshore drilling. Management is also becoming more bullish on oil prices:

“Speaking of the market, oil prices have become more constructive over the last few months, with Brent reaching a two-year high near the $60 mark, both at the end of the third quarter and again over the last week.”
Many of its customers breakeven costs are at or below $50 a barrel in many deepwater basins around the world, which should continue to drive a favorable long-term view of the market. Management stated last quarter that its market outlook today is far more optimistic than it was 12 months ago:

“Floating fixtures awarded in 2017 to-date have already exceeded last year's total by approximately 40%. In fact the deepwater drilling industry has experienced six consecutive quarters with increasing floater contracting activity,” according to the earnings call.
Below is a chart of Brent Crude Oil prices over the last 5 years. Declining prices due to market oversupply pushed revenue, and thus the share prices of many shippers and drillers lower across the oil industry. With Brent Crude forming a multi-year bottoming pattern, accompanied by upside momentum, near-term pain of declining prices looks to have subsided. As the price of oil continues to push above many producers’ breakeven prices, RIG’s share price should similarly continue higher.

Conclusion

RIG’s share price looks to be forming a bottoming pattern with a reversal higher on increasing sentiment. Management’s outlook is optimistic as it has reduced costs and positioned for rising oil prices. With oil prices now showing strength to the upside, RIG’s share price could continue to trend higher as investors re-enter a beaten down company, which has already weathered the oil collapse of 2014-2015.

Disclosure: I am/we are long RIG.

Gaston Lagaffe 12 november 2017 13:06

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This Key Comment From Transocean Was Unnoticed By Investors -- Seeking Alpah --

Nov. 8, 2017 Vladimir Zernov

Transocean shares continue to rise on the back of higher oil prices.

The recent quarterly report was well-received by the investment public, but a key comment was unnoticed.

Once again, the company showed its pessimism regarding the speed of recovery through action while verbal commentary remained upbeat.

When looking at Transocean’s (RIG) third-quarter results and remarks made on the earnings call, many investors seem to be focused on the headline beat and the size of company’s backlog. At the same time, a much more important piece of information with industry-wide implications was unnoticed by the investment public. Without further ado, let’s move straight to the company’s comment on the recent contract with BHP Billiton (BHP):

“Adding to our optimism, we have seen operators in multiple basins now contracting ultra-deepwater assets for multi-year projects for the first time in over two years. As evidence of this phenomenon, we recently announced a new two-year contract with BHP for the Deepwater Invictus, which includes dayrate adjustments for any changes in the operating location, and three additional one-year options with escalating dayrates, including market rate adjustment in years four and five."
Let’s go back in time a bit. When it became known that BHP was searching for a rig for a project in Mexico, Transocean was an obvious candidate for the job. Deepwater Invictus was already working for BHP, so the rig had a big advantage over its competition. However, when the company revealed the first details of the contract, the market was uninspired. The problem was that Transocean locked the rig for 2 years at just $145,000 per day – a low rate for a modern rig with a solid performance history with the same customer and a 75% discount from the previous dayrate of $592,000.

This contract came with three one-year options, and I expected that all of them will be priced at market rate. However, now we learned that the market rate adjustment will be done just in the years four and five, leaving the year three with an “escalating dayrate”. As a reminder, the fixed portion of the contract with BHP starts in April 2018 and ends in April 2020. Thus, assuming BHP exercises its options, Deepwater Invictus will begin working at a market rate from April 2021. Whatever good happens to offshore drilling in 2018 – 2020, any upside from the contract is postponed to 2021.

In my opinion, there is stark difference between Transocean’s words and actions. In my pre-earnings article “A Deep Dive In Offshore Drilling Ahead Of Q3 Earnings”, I noted that Transocean’s earnings call would be one of the most interesting to hear as the company expressed great optimism about the upcoming offshore drilling market recovery but on practice chose defensive deals. The company's comment regarding Deepwater Invictus contract falls perfectly into this trend. Obviously, a company that expects a robust recovery would like to receive market rate after locking its rigs on a low dayrate for two years. However, Transocean is once again acting as a company that does not expect a material pick-up in dayrates in the coming few years.

The recent upside in oil prices is yet to move Transocean to new highs. It looks like the market has become a bit cautious on offshore drillers after a spectacular rally from August lows. In my opinion, more tangible evidence of a turnaround is necessary for more upside in Transocean shares and other drilling stocks. Fundamentally, the industry remains vulnerable as new contracts come at near cash-breakeven levels. I find it rather worrisome that the undisputed leader in backlog cannot push for a market rate after locking the modern drillship for two years at less than $150,000 per day. I believe that this issue is mostly unnoticed and undiscussed but deserves great attention. With drillers now concealing their dayrates, Transocean provided plenty of information regarding its contract with BHP including both the dayrate and the pricing mechanism for the three one-year options. I originally stated that the contract was a big achievement for BHP, but now it looks even better, as I expect that the contractual “escalating dayrate” for the third year will be lower than the market rate in 2020.

Gaston Lagaffe 12 november 2017 13:08

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Transocean Won't Be Cheap For Long --- Seeking Alpha ---

Nov. 6, 2017 Leo Nelissen , BN Capital

Oil is ready to rip higher after breaking $55 last week.

The third quarter showed that management measures are paying off and that the company is well positioned for this environment.

Transocean will quickly cross $12 per share and run toward $13 on the short term.

In this article, I'm going to explain why Transocean (RIG) will continue its uptrend and benefit from a massive oil bull market over the next few months.

Source: Logonoid

Favorable Market Outlook

On the first of September, I wrote an article covering the strong outlook for oil. Since then, oil has almost rallied $10 per barrel.

Article: Oil Is About To Rip

The key points to a sustainable oil bull market are lower inventories and peaking shale production.

At this point, we are getting both. Oil production is peaking close to 9.2 million barrels per day after recovering quickly since 2016 backed by cheap production (low break-even prices) and the need to clean up balance sheets and free cash flow in general.

One of the reasons why the latest production rallied added to the current favorable outlook is the fact that OPEC didn't like that US shale is benefiting from OPEC production cuts since the US is not a part of OPEC. Shortly after the most recent cut, we got the news that Saudi Arabia is cutting crude exports to the US simply to force the US to drain its inventories.

And the plan is being executed as you can see in the graph below. Crude imports from Saudi Arabia are dropping like a stone since the first quarter of this year.

And looking at inventories in general and the US' most intensive oil region (PADD 3), we can conclude that the plan is working indeed.

Source: EIA

Moreover, we are finally seeing that oil and gas service and equipment stocks (XES) are outperforming. The reason why I said "sustainable oil bull market" at the beginning of this article is because service and equipment stocks only perform well if traders expect a sustainable rally above prices that warrant capital expenditures for oil major and independent O&G companies.

The graph below compares the ratio spread between oil and gas equipment and service companies (XES) and energy stocks (XLE) to the price of oil. It seems that we are finally getting upside after printing a higher low in September of this year.

Transocean Agrees

In its third quarter earnings press release, the company made clear that they have a favorable long-term view of the market. The company is far more optimistic compared to 12 months ago according to CEO Jeremy Thigpen. One reason is the lower breakeven price for most drilling projects of around $50 which, in combination with higher oil prices, has led to a 40% increase of awarded floating fixtures on a YTD basis.

In addition to that, Transocean mentions that operators in multiple basins are now starting to invest in ultra-deepwater assets for the first time in two years.

However, the company also mentions that despite being more optimistic the business is still in the midst of a downturn. Hence, the company is continuing to focus on cost reduction and margin optimization.

I believe that this is extremely positive in case "my" oil bull case continues. That way, you are not buying into overoptimism while you get a company that uses a conservative approach when it comes to new investments and optimization of current operations.

Cost Cutting And Strategic Positioning

One of the things that strikes when looking at Transocean's balance sheet is the reduction of property, plant and equipment. PP&E has declined roughly $4.8 billion in 2017 so far. This is mainly due to the lower rig portfolio.

Source: Transocean Q3/2017 Press Release

All of this PP&E reduction is part of Transocean's plan to realize efficiencies in every aspect of its business.

First of all, the company bought Songa Offshore. This added seven floaters to Transocean's portfolio. These seven floaters include four harsh environment rigs that will deliver tremendous value to Transocean in an environment that is starting to like the idea of ultra deepwater drilling again.

This brings the total rigs under contract with investment grade operators to nine.

Of note, the Deepwater Pontus and the Deepwater Poseidon are the fourth and fifth contract-backed newbuild drillships delivered to our fleet in the past two years. With the addition of these five new builds and the four Cat-D Songa rigs that will soon become part of our fleet, we will have a total of nine assets contracted with investment grade operators for terms extending through at least the end of 2021 and as far as 2028.

- Transocean Q3/2017 Earnings Transcript
So far, I have only discussed acquisitions and new rigs even though I wanted to explain the reduction of PP&E. That's why the acquisitions are nothing compared to the number of retired rigs since the downturn.

In the third quarter, Transocean announced to remove six additional rigs from its portfolio. This includes five ultra-deepwater assets. Since the start of the downturn of the oil price, the total number of retired rigs comes in at 39

ChartRIG data by YCharts
So far, it seems that management measures are working. Debt to equity is currently at 1.7 after hitting 2.2 after the oil bottom of 2016. I believe that the current path of retiring assets while only buying assets that are strategically key will give the company big advantage going forward.

Another example is the $750 million debt offering which addressed all unsecured bond maturities before 2020.

Conclusion and One Last Graph

From a technical standpoint, it seems that Transocean is ready for a big move higher. The RSI is in a strong uptrend and it seems that momentum is coming back over the next few days. $12 is my first target after which we will see 13$ rather sooner than later.

In fundamental terms, I think that bulls are on the winning side. Oil should move higher to at least $60 over the next few weeks. This will be backed by lower inventories, peak production and an accelerating economy.

Transocean will benefit as beaten-down service & equipment companies will be back on track in an environment where lucrative offshore drilling contracts are accelerating. Add to that Transocean's strategic positioning and retirement of old rigs while keeping an eye on a sustainable balance sheet and increasing profitability.

Thank you for reading my article. Please let me know what you think of my thesis in the comment section below. Your input is highly appreciated!

Disclosure: I am/we are long RIG.

Gaston Lagaffe 12 november 2017 13:13

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Transocean - Time To Turn The Corner Soon? --- Seeking Alpha ---

Nov. 3, 2017,Fun Trading

Total quarterly revenues of $808 million were down 10.5% year over year on lower day rates but up 7.6% sequentially.

The backlog is clearly the strength of the company, in my opinion, which is the fundamental reason why I consider RIG as number one in this segment.

I recommend to buy RIG on any weakness.

Transocean (RIG) - The Deepwater Invictus.

Gross Tonnage: 68034: Deadweight: 62918 t: Length Overall x Breadth Extreme:238m × 42.04m: Year Built: 2014

Investment Thesis

It is not a secret, the offshore drilling industry is not doing well and drillers are struggling to survive while waiting for an elusive recovery that appeared to slip further away, until now, due to a stubborn low oil price environment.

However, oil is starting to show strength again boosted by OPEC and evidence of stockpiles falling. Brent is over $60 and exuberance is on the street running and screaming. Will it last?

While earning results are not stellar, the offshore market is far from being dead and we see signs of a rig market recovery appearing this year. Rig contracting activity and utilization are on the rise, asset values are increasing, crude oil benchmark prices is growing strong, albeit not sufficient enough to trigger new activity on their own yet.

But, it will! Even if looking at the rearview mirror (earnings) is not particularly telling. Offshore will get its piece of the pie and because they are a "service" they will have to be a little more patient, nothing wrong with that. More, It will be slow because the industry is still extremely oversupplied and consequently is dealing with dismal day rates. Still, one thing for certain is that it is coming.

Transocean is definitely one of the best offshore drillers with a record backlog of over $13.5 billion (10/17) after the acquisition of Songa is offshore is completed. Read my article here.

The conclusion is that offshore drillers could be at the bottom, and it is time to invest in this sector again for the long-term, in my opinion. RIG is the first choice if you decide to get involved with the sector. Here is why.

Transocean - Balance Sheet history.

Transocean 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17
Total Revenues in $ Million 1,884 1,608 1,851 1,341 940 903 974 785 751 808
Net Income in $ Million 342 321 685 235 82 229 223 91 -1,690 -1,417
EBITDA $ Million 756 663 968 646 433 572 604 414 -1,368 -922
Profit margin % (0 if loss) 18.2% 20.0% 37.0% 17.5% 8.7% 25.4% 22.9% 11.6% 0 0
EPS diluted in $/share 0.93 0.88 1.87 0.64 0.22 0.62 0.58 0.23 -4.32 -3.62
Cash from operations in $ Million 1,311 648 960 631 207 440 633 184 319 384
Capital Expenditure [TTM ]in $ Million 1,079 1,654 2,001 2,168 2,431 1,737 1,344 1,098 776 658
Free Cash Flow (Ychart) in $ Million 1,116 -292 295 263 -251 194 361 62 183 256
Cash and short term investments $ Billion 3.769 2.234 2.339 2.574 2.153 2.534 3.052 3.093 2.471 2.717
Long term Debt in $ Billion 10.02 8.75 8.49 8.45 8.22 8.26 8.46 8.40 7.36 7.27
Dividend per share in $ 0.15 0.15 0 0 0 0 0 0 0 0
Shares outstanding (diluted) in Million 363 364 363 364 365 365 373 390 391 391
Backlog 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17
RIG Backlog in $ billion 18.6 16.9 15.5 14.6 13.7 12.2 11.3 10.8 10.2 9.4
Note: Most of the data indicated above come from YCharts

Trends and Charts: Revenues, Earnings Details, Free Cash Flow and Backlog discussion.

1 - Quarterly revenues.
Total quarterly revenues of $808 million were down 10.5% year over year on lower day rates but up 7.6% sequentially. Results beat street expectations which are often the case. Transocean's high-specification floaters contributed about 88.3% to total contract drilling revenues. A bottom is now clearly on the horizon and offshore companies are increasingly more confident. The company said in the conference call:

With our customers continuing to tout breakeven cost at or below $50 a barrel in many deepwater basins around the world, we continue to have a favorable long-term view of the market.

Adding to our optimism, we have seen operators in multiple basins now contracting ultra-deepwater assets for multi-year projects for the first time in over two years. As evidence of this phenomenon, we recently announced a new two-year contract with BHP for the Deepwater Invictus, which includes dayrate adjustments for any changes in the operating location, and three additional one-year options with escalating dayrates, including market rate adjustment in years four and five.
2 - Free cash flow.

Free cash flow is an important hint that should be always evaluated carefully when looking at a long-term investment. Basically, FCF should be sufficient and of course positive, if the business model can be regarded as sound.

RIG has generated $862 million in FCF the past four quarters, which is quite impressive considering the offshore drilling situation.

Henceforward, it must be sufficient enough to pay for the possible dividend, reduce debt and fund an eventual shares buyback. RIG is passing the FCF test.

3- Quarterly Backlog history and discussion:

Jeremy D. Thigpen, the CEO, said in the conference call: In August, we entered into an agreement to acquire Songa Offshore and its fleet of seven floaters, including four new harsh environment, high-specification Cat-D semisubmersibles. As a reminder, these Cat-D rigs were designed in collaboration with Statoil and are currently contracted to Statoil with a total backlog of approximately $4 billion, which extends into 2024.
Consequently, the total backlog is now $13.5 billion including Songa Offshore. Please, read my preceding article about the recent FSR, it is important.

Songa Offshore Backlog will add an extra $4.1 Billion of firm contract from Statoil (STO).

The future acquisition will increase RIG backlog significantly to $13.5 billion, not including options (an extra $3.7 billion if exercised).

Compared with the third quarter of 2016, day rates fell 3.9% -- from $332,100 to $319,000. However, this average is not really telling because of the impact of the Jack-up segment that has been recently sold to Borr Drilling.

Jeremy Thigpen said:To be clear, dayrates in the deepwater markets remain under extreme pressure today. However, as activity begins to tick up and asset availability becomes tighter, especially for those higher-specification, more efficient drilling machines, we fully expect to see dayrate improvement over time.
The firm contract backlog is clearly the backbone of the company, in my opinion, which is the fundamental reason why I consider RIG as number one in this segment. Please, take a look at my other article about Ensco (ESV) results. Please read here.

Commentary:
Transocean again beat analysts' estimate this quarter and recorded a modest increase in revenues sequentially. It is not stellar and we have still a long way to recovery that seems painfully slow for long-term shareholders, nonetheless, it is now clearly on the horizon. The caveat lector is that it will take longer than the oil producers' segment because the company is further away down the food chain.

Disclosure: I am/we are long RIG, ESV.

Gaston Lagaffe 15 november 2017 11:15

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Onderstaande analyse door Vladimir Zernov geeft goed aan waar de risico's bij de Offshore drillers liggen. Een interessant artikel voor iedereen die wil beleggen in deze sector.

Transocean: Is Deepwater Doomed?

Nov. 14, 2017 Vladimir Zernov --- Seeking Alpha ---

In this article, I discuss the long-term fundamentals of deepwater production.

There are four main obstacles for deepwater now: EVs, shale, renewables and rig oversupply.

Here, I share my views on the impact of EVs and shale on deepwater in general and Transocean in particular.

This article is inspired by comments to my previous article on Transocean (NYSE:RIG), titled "This Key Comment From Transocean Was Unnoticed By Investors." In the article, we started a discussion on a very fundamental issue: Is there a future for deepwater production? If the answer to this question is "no," then deepwater specialists like Transocean and Diamond Offshore (NYSE:DO) should be avoided, or even shorted after each major rally.

Why deepwater drillers might be in terminal decline

Here, I will try to formulate the most common arguments against any future perspectives for deepwater production.

Electric vehicles (EVs) are a hot topic now, so let's start with them. The theory goes that soon the auto market will be dominated by EVs, which will dramatically decrease the demand for oil. Making things even worse, the auto market will switch to robo-cars that don't need humans at the wheel.

In a logical step forward, several leading companies will accumulate fleets of these vehicles, providing them on demand for passengers (transportation-as-a-service). This will increase efficiency and further decrease the demand for vehicles. No one except die-hard car fans will own a car anymore. Oil prices will drop through the floor, and no one will need deepwater production anymore.

The second blow comes from shale. Shale will grow and replace deepwater. Due to its short-cycle nature, shale will easily beat deepwater in a battle for investment dollars. Also, shale oil is not limited to the U.S., so you can expect production growth elsewhere. No major oil company will invest in deepwater anymore, as all the money will be going to shale.

The third blow is a push toward renewables. Solar, wind, etc. will take over oil's market share. Once again, deepwater is at the higher end of the cost curve, so it will fall first.

Also, we should not forget about the oversupply of rigs in the deepwater segment. It will take years before drillers achieve any pricing strength, and by that time, the game for oil will be over due to the reasons described above.

I believe these four key elements (EVs, shale, renewables and rig oversupply) are a good summary of long-term deepwater bear arguments. If you see other reasons why deepwater is doomed, please share them in the comments section. In the meantime, I will share my views on why I believe deepwater has a future despite the growing electric vehicle market, surging shale production, the push toward renewables, and the current oversupply of rigs.

Electric vehicles

Tesla (NASDAQ:TSLA) gets the lion's share of market attention, but there are many producers who already have developed - or are in process of developing - their own electric cars. Nevertheless, the actual size of the electric vehicle industry is still small. Take a look at deployment scenarios for the stock of electric cars published by the International Energy Agency:

The world is obviously early in the electric game, which gives life to all kinds of projections for the future of the electric vehicle market. Nobody has a crystal ball, so market enthusiasts are free to make rosy forecasts regarding the speed of EV adoption.

I see two major problems with these projections. The first one is that nobody seems to take into account cost escalation, which will surely occur as the number of EVs grows. The second one is that many projections are based on the assumption that the whole world resembles the major metro areas of highly developed countries, which is obviously very far from the truth.

Think that's an exaggeration? Let's take a quick look at the RethinkX report on the future of transportation, which was widely discussed back in May. In short, the report speculated that disruption by self-driving EVs will lead to a decrease in oil demand to 70 million barrels in 2030 and a corresponding collapse of oil prices to $25.4 per barrel. I had many questions after reading this report, but I'll limit myself to two points, which, in my view, are characteristic of the quality of many "visionary" predictions in the EV space. Here's the first one:

The obvious question here is why Saudi Arabia, which is a very low-cost producer, has to limit its production, while much more expensive oil is produced by others. The answer is simple: Oil is a strategic resource, and the oil market is not a fully competitive market - and will never be. Oil is so much more than gasoline in your car - it's in planes, ships, various chemical products, and even in your clothes. In this light, basing a model on an assumption that "X million cheapest barrels will be produced" is making the model invalid right from the start.

Here's another assumption from the RethinkX report:

So, when the U.S. adopts electric vehicle transportation-as-a-service, China does it the same year and the rest of the world follows with a four-year time lag. Rio de Janeiro, Moscow, Johannesburg, and maybe even Kinshasa follow a model adopted in New York in just four years - if you believe the RethinkX report. Meanwhile, the actual map of Electric Vehicles Initiative, a multi-government policy forum established in 2009 to accelerate the deployment of EVs worldwide, looks like this:

The world is growing, both in terms of GDP and in population. The United Nations is projecting that the world population will grow from the current 7.6 billion to 8.6 billion in 2030, 9.8 billion in 2050 and 11.2 billion in 2100. While the year 2100 is too far away to make a reasonable forecast, I have no doubts about the 2030 population projections. The population growth comes together with GDP growth and is much more pronounced in developing nations, most of which are not pushing EVs:

This means more and more people in developing nations will be able to take a step away from poverty and will want a starter, cheap car. Used ICE cars will likely be imported from the developed nations' markets. I see zero chance that developing nations outside of China, which has painted itself into a corner with huge environmental problems, will push EVs and EV infrastructure in the foreseeable future. You can certainly expect that people who, for the first time in their life, are able to afford something beyond their basic needs will want a car to drive and meat on the table and will completely ignore any green agenda. Extrapolating major metro area trends to the big and very diverse world is a huge fallacy that makes the EV era look closer than it is in reality.

Vertraagd	30 jun 2019 17:30
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