Transocean Reporting Higher Drilling Rates

• The Company: Transocean, the world’s largest offshore drilling contractor.
• The Filing: FORM 10-Q filed with the SEC on November 6, 2008.
• The Finding: Transocean believes most of its deepwater drilling projects remain economically viable at $60 oil and the company reports seeing no change in interest from its customers regarding additional deepwater capacity, or renewal of existing services.

The Upshot: Transocean continues to experience historically high day rates across its high-end fleet, with average daily revenue per rig of $369,300, up 26 percent from third-quarter 2007. Management expects deep-water and harsh environment drilling revenue in the fourth quarter of 2008 and the full year 2009 to benefit from commencement of higher rate contracts and start-up operations of five new ultra-deepwater drillships. In addition, the company believes that exploration successes in the deepwater offshore provinces of Brazil, Angola, and India will continue to drive significant demand for its Ultra-Deepwater Floaters.

Transocean inked a five-year deal in October with Exxon Mobil for a Hyundai Heavy Industries drillship. The contract is expected to commence in the fourth quarter of 2010 at $650,000 a day for operations in Brazil and $640,000 per day for operations in the US Gulf of Mexico. Depending on the country of operations, contract revenues over the contract term are expected to range from $1.17 billion to $1.19 billion.

Chief Executive Bob Long told analysts during the recent third-quarter 2008 conference call, however, that there were some markets in the mid-water floater and jackup business, such as the North Sea, where he anticipated $60 oil might adversely impact margins. He is also no longer optimistic that the $700,000 threshold for deepwater average day rates will be crossed this year.

Contract backlog at October 31 was approximately $41.1 billion, up from approximately $32 billion at December 31, 2007. In addition, no contract contains any put clause where counter-parties could nullify or modify terms to any signed deals due to falling energy prices. Long said on the call that 90 percent of its drilling contracts are with investment-grade companies or state-owned oil companies.

The Question: Despite signed contracts, with oil prices now trending below $60 a barrel, could Brazil’s state-owned oil company, Petrobras, and/or independents (such as Chevron and StatoilHydro) delay drilling activities of certain offshore blocks in the (difficult to access) Brazilian Tupi field and Gulf of Mexico — and postpone delivery of eight Transocean drillships still in construction shipyards?