Transocean plans to reactivate cold-stacked drillships soon
I’ve previously covered Transocean (NYSE:RIG), so investors should consider this an update to my previous articles on the company.
Leading offshore driller Transocean last week announced fourth quarter results largely in line with expectations despite unplanned downtime for the drillship deep water bridge after rigging lost a blowout preventer (“BOP”) in the Gulf of Mexico.
Earlier this month, the company released a new fleet status report which showed a decent improvement in the daily rate for short-term work in the Gulf of Mexico, but the continued lack of long-term contract awards resulted in a sequential drop in backlog from $600 million to a just under $6.5 billion.
For the quarter, the company recorded adjusted EBITDA of $250 million while operating cash flow reached $185 million.
Liquidity continues to be strong with nearly $1 billion in unrestricted cash at year-end and $1.3 billion still available under the company’s unused revolving credit facility.
Unfortunately, Transocean is forecasting a whopping $1.3 billion in capital expenditures in 2022, with the vast majority of that amount tied to the scheduled delivery of the 8th generation ultra-deepwater drillships. Atlas in deep waters and Titan of the Deep Later this year.
Additionally, the company faces a total of $524 million in scheduled debt maturities and principal installments this year.
Worse still, Transocean will have to make up for a cash flow of nearly $230 million hit this year after drilling Conqueror of the Deep and Skyros in deep waters ended their old ultra-high margin contracts last quarter.
In particular the decision to extend the Skyros in deep waters One-year contract with TotalEnergies at a painfully low daily rate of $195,000 hurts, but this decision was made in 2020 at a time when the sky seemed to be falling for the offshore drilling industry.
Undoubtedly, management has a lot to accomplish over the next two quarters to avoid a cash crunch and position the debt-ridden business for the future.
First, Transocean’s $1.3 billion senior secured credit facility is currently set to mature in June 2023. The company will either have to extend the facility or find other ways to improve its liquidity. .
With activity picking up in a number of regions and real daily rate progress in the Gulf of Mexico, Transocean now has a decent chance of securing an extension later this year or early 2023, but banks will probably need clarity on the fate of the so-called “CAT-D” rigs:
“CAT-D” platforms transoceanic equinox, Transoceanic Endurance, Transocean Encourage and Transocean Enabler are expected to terminate their respective contracts with Equinor (EQNR) between Q4/2022 and Q1/2024.
These semi-submarines were purpose-built to Equinor specifications and accounted for 30% of company revenue and an even higher percentage of adjusted EBITDA last year.
Although Equinor holds priced options for all platforms, the company is unlikely to exercise them in the current environment, as daily rates off Norway have not budged much over the past few years. quarters and exercise prices are well above current market levels.
On the other hand, activity in Norway is expected to largely pick up next year as generous tax incentives have spurred the approval of additional projects.
At this point, I would expect Equinor to extend two rigs at market rates later this year and decide on the remaining rigs sometime next year. At an assumed daily rate of $350,000, the company would face a rather manageable cash flow of $50 million next year.
Failure to extend rigs in a timely manner and on sufficient terms would be a disaster, as banks could very well refuse a credit facility extension in this case.
Transocean will also face nearly $1.7 billion in aggregate debt maturities and principal installments in 2023 and 2024.
Last year, the company secured $460 million in overall shipyard financing for the Atlas in deep waters and Titan of the Deep. Additionally, Transocean expects to raise approximately $350 million in secured debt against the Titan of the Deeplong-term contract with Chevron (CVX).
In order to bolster its liquidity and strengthen its balance sheet, Transocean Between in a $400 million stock distribution deal with Jefferies LLC last year. So far, the company has sold 36.1 million shares on the open market for net proceeds of $158 million.
But even including the $1.3 billion credit facility, the $350 million in new secured debt mentioned above, and the $275 million in restricted cash, Transocean expects liquidity of just 1.4 to 1. $.6 billion as of June 23, 2023, which represents the maturity date of the credit facility.
In a recent presentationthe company has made the case for its business by supporting long-term debt of approximately $4-4.5 million going forward, compared to net debt of nearly $5.8 billion as of December 31 .
Transocean needs an operating fleet of 25-30 rigs operating at average daily rates of $300,000 to $275,000 to generate sufficient free cash flow to reduce debt.
Thanks to a decent number of former high-margin contracts with Shell PLC (SHEL) and Equinor, Transocean’s average daily rate was calculated at $365,600 last year, but the use of the company’s fleet was only 53.4% due to a large number of rigs being cold stacked or momentarily inactive.
Especially the old ocean platform boreholes”Apollo Ocean Platform“, “Mylos Ocean Platform”, “Athena Ocean Platform” and “Olympia Ocean Platform” have been stacked for more than five years already, making a reactivation increasingly difficult both from a technical and financial point of view. Frankly, I would not be surprised to see each of these platforms require a good investment north of $100 million to get back in service.
On the conference call, management said it expects to reactivate some of its cold rigs soon, in stark contrast to rivals Noble Corporation (NE) and Valaris (VAL).
While Valaris is currently in the process of reactivating a number of floaters after securing long-term contracts last year, the company has no plans to unstack any additional rigs at this time.
Noble Corporation does not even offer its cold drill ships due to an alleged lack of long-term contract opportunities at sufficient rates.
On the other hand, leading offshore drilling equipment supplier NOV Inc. recently pointed out “reactivation discussions on more than a dozen stacked floating platforms“.
Given these conflicting statements, investors will be eager to learn more about Transocean’s reactivation plans. But even in the event that the company manages to secure long-term work for some of its cold rigs, reactivation will require massive upfront investments, which will put additional pressure on liquidity.
With the first major market finally showing decent improvement, I remain positive on the offshore drilling industry, but as customer capital budgets remain tight, further recovery should be gradual.
While Transocean’s large fleet of cold-stacked floats offers plenty of options in a tightening market, I continue to prefer restructured players with healthy balance sheets and decent liquidity like Noble Corporation or Valaris at this stage of the cycle.
But if things in the floating markets really start to take off and Transocean manages to get its debt and liquidity issues under control, the company’s shares should start to significantly outperform their less leveraged peers.
With the rising tide likely to lift all platforms, speculative investors should consider an investment in Transocean.