A New Contract
Good morning everyone. This will be a quick post on an offshore driller I started buying in the $3.00 per share range. The news yesterday on the name was compelling. And I think it will spill over into the entire offshore drilling market once the market digests everything. But before we get into the news, first a word from today’s sponsor…
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Transocean Contract
Yesterday after the market close Transocean (RIG) announced a contract award for the ultra-deepwater drillship Dhirubhai Deepwater KG2. The contract is from Petrobras for work in Brazil at a 910-day award for a backlog of $392 million. The contract is expected to commence in the third quarter of 2023.
This contract is significant for the entire offshore drilling industry. The Dhirubhai Deepwater KG2 was an idle sixth generation rig built in 2010 that was awarded a day rate of $430k/day on a three year contract. As context, the Dhirubhai was warm-stacked for one year and their old contract terms were $190-215k per day. The contract term also excludes a mobilization fee of nearly $40 million.
If an idle sixth generation rig built in 2010 can secure a long-term three year contract at $430k per day I am guessing we will start to see day rates surpass $475-500k/day on on newer seventh generation drill ships.
In addition, with the last remaining warm-stacked drillship now gone, Transocean will either have to pick up additional stranded newbuilds or start reactivating cold-stacked drill ships which won't be an easy task.
The offshore drilling industry is by far one of my favorite industries right now. The market is extremely tight. The players are rational. Rates are rapidly moving up. And operating leverage is starting to kick in.
New readers of Alpha, please see my primer article on the offshore drilling industry where I make the case that the entire industry could 6-8x in value over a multi-year period. The thesis is rather simple:
In my opinion, the companies and industry who will benefit the most from a resurgence in oil and gas investment is offshore drillers. The thesis is simple:
Offshore drilling is essential for the future source of oil and gas production. If you want to consume oil and gas you need offshore drilling.
The industry went through a massive restructuring and bankruptcy process that has changed the dynamics of the industry. Almost all players have clean balance sheets and investors want a return of capital.
50% of the fleet was scrapped during the past nine year downturn. There is likely to be a rig shortage that will drive up day rates.
The costs to build a new drillship is over $1 billion and will take 2-3 years to complete. No one is building new drillships at current day rates. For more supply to be added we need rates to at least double. Should rates double, operating leverage will kick in and offshore drillers will print money.
Public equities are trading at $0.20 on the dollar per replacement cost. Investors are essentially buying $1 billion drillships for $200 million, with an extremally tight market and day rates expected to rise.
The setup is incredible for the industry and things are moving fast. This new contract for Transocean is meaningful for the entire industry and we should start to see additional contracts get announced over the next few months.
Disclosure: I own Transocean (RIG) and will buy or sell my shares anytime following this article. This is not investment advice. I am not an investment advisor. Do your own research.
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