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Transocean's Problems Run Deeper Than Lost Revenue From Gulf Spill Drill Ban

By David Phillips

Updated on: June 22, 2010 / 12:38 PM EDT / MoneyWatch

Transocean chief executive Steve Newman said, on balance, the current six-month moratorium on deepwater drilling in the Gulf of Mexico is unlikely to materially impact near-term cash flows. Activity in other offshore markets won't mitigate anticipated revenue loss from force majeure declarations in the U.S., however, should the driller cede to demands for retesting of blow out prevention equipment on its other deepwater rigs. On May 30, President Obama suspended deepwater exploration and drilling in the Gulf of Mexico for an additional six-months, ostensibly to improve oil worker safety and provide sufficient time for investigators to better understand the cascade failures behind BP's Macondo field blowout (though any probe is likely to focus on why the rig's blowout preventer failed to activate).

Cash flow implications from the Deepwater Horizon accident on the world's largest offshore driller are fairly straightforward:

Replacement cost for the semi-submersible rig, capable of operating in water depths up to 10,000 feet, is about $600 million (most of which was covered by insurance, less depreciation);
Loss of revenue between April 22, 2010, and the rig's contract termination (in September 2013) expected to be approximately $613 million; and,
EBITDA is estimated at approximately $435 million over the remaining life of the rig's contract, according to credit agency Fitch Ratings.

Interior Secretary Ken Salazar has ordered the temporary cessation of drilling activities at 33 deepwater sites operating in the Gulf waters off the U.S. coast, including a fleet of 14 rigs owned by Transocean. Although oil and gas exploration customers of the rig contractor are citing the drilling ban to declare force majeure -- nullification of their contractual obligations due to unavoidable events beyond their control -- most industry experts agree with chief executive Newman's assessment that the impact on near-term profit performance would likely be modest, as all of the targeted contracts contain standby fees (daily idling charges) and steep termination fees (day rates times duration of contract).

Both Anadarko Petroleum Corp (APC) and Norwegian state-controlled Statoil ASA (STO) have invoked force majeure on Transocean rigs, basing their claims on lost drilling opportunities in the Gulf on the six-month ban.

Anadarko had leased the Discoverer Spirit rig for more than $505,000 a day through November 2013. Statoil is leasing the Discoverer Americas for $482,000 a day through October 2013.

Other U.S. Gulf customers, such as Chevron (CVX) and Australia's BHP Billiton, are reportedly mulling force majeure actions too.

Contract law experts I spoke with suggested that Transocean -- not looking to lose important clients -- would probably re-negotiate "win-win" terms with both energy companies. For example, the rigger could present a relocation option to Anadarko, reasoning that the energy company could honor its obligation by redeploying the Discover Spirit to one of its offshore projects in West Africa or Brazil. Newman confirmed on a May 28 investor conference call that drilling contracts typically include such a change in locale provision.

Moreover, Petrobas (PBR) would probably be eager to engage any floaters that come off canceled contracts or delayed U.S. Gulf projects, intimated Newman on the call. A Bloomberg news report yesterday confirmed that the Brazilian state-run company is looking to invest $224 billion through 2014 to further develop its offshore reserves, tapping geological formations in the "pre-salt" layer located about 160 miles off the coast from Rio de Janeiro -- home to the massive 2007 Tupi strike (estimated proved reserves between 5 and 8 billion barrels of oil equivalent).

On June 11, Citigroup analyst Robin Shoemaker estimated that Transocean's 'at-risk' contract backlog from U.S. offshore Gulf operations was a nominal 6.4 percent, or $1.8 billion out of total company backlog of $27.9 billion as of June 1.

The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true -- American writer James Branch Cabell

Citigroup sees only the best possibilities to Transocean's sizeable fleet of offshore drilling rigs, spread across the globe; whereas, I fear this strength could also prove to be the company's greatest weakness: inferior well casings and faulty blow out preventers are recurring safety issues in foreign markets.

More recently, word circulated last month that the rig contractor had blow out preventer problems on three drillships working in waters off India's east coast. The company has 12 rigs operating in Indian waters and derives about 10 percent of contract revenues from this growing market.

As customers nullify contracts in the Gulf -- and more rigs are stacked -- excess capacity will put downward pressure on rig day rates: ultra-deepwater rates will quickly fall below the current floor price of $450,000 per day. Moreover, if operators are desperate to unload rig time and reduce some of their spread costs -- coupled with 13 uncommitted newbuilds coming out of ship yards in the second half of 2010 or in 2011 -- rates could stay depressed well into next year, predicts ODS-Petrodata (with the ripple effect pushing rates lower in shallower markets too).

Looking ahead, when the drilling ban is lifted, higher insurance premiums and operating costs will squeeze profit margins. Should stringent new safety regulations include required retesting of rig equipment -- here and abroad -- more of Transocean's backlog of $27.9 billion could be "at risk."

For complete coverage, see: All Things BNET on BP's Gulf of Mexico Spill Related Posts:

Transocean Predicted to Easily Ride Out Gulf Oil Spill