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Transocean (RIG) Ultra Deepwater Drillship Contract to End

Zacks Equity Research
Updated
WF vs. BEN: Which Stock Is the Better Value Option?

Shares of Transocean Ltd. RIG declined more than 7% on Sep 21 after the company received a notice of termination for one of its  drillships from the oil giant Chevron Corporation CVX. The contract pertains to Transocean’s ultra deepwater drillship — Discoverer Clear Leader — operating in the Gulf of Mexico. The contract will be terminated effective November 2017, nearly a year prior to its expiry in October 2018. The drillship has been under contract since 2014 at a dayrate of $575,000.

Per the terms of the contract, Transocean will receive $148 million as compensation. The compensation amount is the present value of the operating dayrate less the operating costs per day. The termination of contract is in line with Chevron’s aim to cut operating and capital costs as it suffering from cash flow deficits.

The contact termination for DiscovererClear Leader is likely to adversely impact Transocean’s revenues and earnings. The company will be liable to pay for the drillship’s stacking costs until it secures another contact for the same.

Transocean is one of the world’s largest offshore drilling contractors along with the likes of Atwood Oceanics, Inc. ATW and Diamond Offshore Drilling, Inc. DO. The company’s technologically advanced drilling fleet and aggressive cost-cut initiatives bodes well. However, Transocean is already facing pressure on top line. In the second quarter, the company suffered a 20% decline in revenues year over year as old contracts have rolled off. Due to this, the company has either to stack those rigs or accept them at a much reduced dayrates leading to lower revenues. Continued pressure on commodity prices are attributed to the decline in revenues.

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Chevron Corporation (CVX) : Free Stock Analysis Report
 
Transocean Ltd. (RIG) : Free Stock Analysis Report
 
Diamond Offshore Drilling, Inc. (DO) : Free Stock Analysis Report
 
Atwood Oceanics, Inc. (ATW) : Free Stock Analysis Report
 
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