Transocean: Lost at Sea
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Offshore drilling company Transocean (NYSE: RIG) seems to be well-positioned for long-term growth in an industry with bright prospects, with the most versatile fleet of mobile offshore drilling rigs to offer to energy companies.
It should be, but sadly it is not.
The Deepwater Horizon oil spill, where it was a partner with BP ADR (NYSE: BP), continues to weigh the company down. This threat of penalties in the range of billions of dollars is well known to investors. But, unknown to some, the company is also faced with major operational difficulties that management seems to be ignoring.
This should put a frown on the face of Transocean stockholders. Some of these shareholders have called on Transocean management to scale back their ambitions until the oil spill issue is resolved but with little luck so far.
Scaling back will be difficult for a company that was put together by mergers and acquisitions and whose management is still focused on that.
The current version of Transocean was cobbled together in 2007 via the merger with Global SantaFe, which made the company the world's biggest offshore drilling contractor. Its fleet of 134 rigs is almost twice as large as the fleets of its nearest competitors, Ensco (NYSE: ESV) and Noble (NYSE: NE).
In particular, Transocean's fleet of 27 specialized floating rigs capable of working in waters deeper than 7,500 feet make the company the world leader for drilling ultra-deep wells that can be found off the shores of Brazil and western Africa.
On the other hand, Transocean still has a lot of old rigs that date back decades. These aging rigs are a main reason the company's returns have lagged its peers.
In the period from 2008-2010, according to S&P Capital IQ, Transocean's return on capital averaged 9%, well below the 14% average earned by Noble, Ensco and Diamond Offshore (NYSE: DO).
Add to the problems with aging rigs the repairs and maintenance needed for blow-out preventers on deep-water rigs (which failed in the BP oil spill) and you seem to have a management team that seems lost at sea. The restructuring of its fleet to focus more on advanced deep-water rigs seems to have inexplicably been put on the back burner.
Instead of upgrading its fleet, company management seems to be more concerned about the making the next deal – the $1.4 acquisition of Norway's Aker Drilling in August was the latest – rather than focusing on Transocean's core business or the legal problems stemming from the Macondo spill or the possible downgrade of its bonds to junk status soon.
Keeping the company's bonds at investment grade rather than junk status is of utmost importance to its future. Not only are its main competitors investment grade, but major oil companies usually only work with other companies who are investment grade. In other words, if Transocean loses its investment grade status, it may find its business drying up.
Adding to the woes of its suffering stockholders, Transocean is likely to be too large to be taken over by any of its rivals. And it is doubtful any major oil company would want anything more than its fleet of deep-water rigs.
The only good news here for shareholders may be that three members of senior management have left the company in the last three months. Transocean needs a further radical shakeup of senior management before stockholders can smile again.
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