Transocean: Strengths, Weaknesses, Opportunities, Threats

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off a shaky third quarter earnings report, in which the company reported a $381 million loss, I would like to pinpoint the former owner of the Deepwater Horizon rig that burst into flames and later sank in the Gulf of Mexico in the BP oil spill, Transocean LTD (NYSE: RIG).

Strengths:

  • Diversified Geographical Presence: Transocean operates a fleet of 115 mobile offshore drilling units, of which are scattered throughout the world, with at least one unit near each continent (except Antarctica)
  • Innovative Advantage: In 2011, Transocean set a world record for the deepest water depth by an offshore drilling rig, an astonishing achievements that the company can use as a selling point to their potential leasers
  • Solid Business Model: Transocean invests millions in purchasing these offshore drilling rigs, and gains back their initial investment by collecting massive daily rates for the usage of them by oil giants, making Transocean’s business model very similar to an real estate investment trust
  • Priced Near Book Value: According to the company’s 2011 annual report, the company has $15.6 billion in equity, or book value, and currently the stock trades with a market capitalization of $16.63 billion, with a current price to book ratio of 1.04
  • Long Term Leases: Many of the leases Transocean’s drilling rigs are under are long-term, and most are multi-year, adding a level of security to Transocean’s future   

Weaknesses:

  • Vulnerability to Disaster: As the world saw with the BP oil disaster, and now the Macondo Well incident, Transocean is greatly exposed to disaster striking one of its rigs, which not only erases that investment, but also opens Transocean up to million dollar fines, as well as a dent in their brand 
  • Underwater: In 2011, Transocean reported an operating loss of $4.776 billion, however the company is projected to barely swing to profits this year
  • Lack of Dividend: At the current moment Transocean does not pay out any dividend and has not expressed any plans to do so in the near future, a major negative in this volatile market
  • Debt: According to the 2011 annual report, the company had $2.039 billion in debt due within one year and $11.497 billion in long-term debt, and until Transocean pays down this debt it will weigh heavily on their core business  

Opportunities:

  • Focus on Ultra-Deep-Water Fleet: The majority of Transocean’s revenue is derived from its ultra-deep-water fleet, and because of this, Transocean is now focusing on this lucrative segment of their business
  • Selling Shallow Water Rigs: The company stated in its third quarter report that it would be exiting the standard jackup market by selling their 38 shallow water rigs for around $855 million in cash, which they could use to reinvest in the business or pay down their debt
  • Acquisitions: The company has a long history of acquiring the fleets or part of the fleet of other companies as they look to expand, and this is certainly a possibility going into the future

Threats:

  • Mother Nature: As we have seen most recently with Hurricane Sandy, natural disasters can cause business to come to a standstill, causing Transocean to lose millions in potential revenue
  • Competition: There are several other companies that also offer offshore drilling rigs up for lease, and this competition can lead to margin contraction as each tries to offer the best product for the lowest price
  • Government Regulation:  The government has been very blunt with the oil industry, because of the potential environmental devastation it is not their favorite method of extracting oil from the Earth, and any government regulation could set up barriers hurting Transocean

Competitors:

Major publically-traded competitors of Transocean include Seadrill LTD (NYSE: SDRL) and Diamond Offshore Drilling (NYSE: DO). Seadrill is slightly larger than Transocean, in terms of market capitalization, and offers similar to identical drilling rigs, and competes with Transocean for the all-important lease agreements. Seadrill pays out a massive dividend yielding northward of 8%. Diamond is smaller than both of the other companies, and also possesses a fleet of offshore drilling rigs.

The Foolish Bottom Line

Transocean possesses several strengths, weaknesses, opportunities, and threats; however, in the end it appears to be a financially unstable company with billions of debt on their balance sheets. The company’s business model is tremendous; though the company pays out no dividend and is currently losing money. However, as oil prices further rise into the future, as is widely expected, the demand for oil will grow, and lease rates will go up. If an investor wants to be in this industry, look to the financially solid Seadrill, and leave Transocean alone until they prove they can make money.    

Know What You Own

For more information on The Motley Fool’s energy stock, Seadrill, check out our premium report on the stock. It gives background on the company and highlights the three areas investors must watch. It also comes with a year of updates on the company, so find out more by clicking here.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services recommend Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus