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Good morning everyone. Today we are going to chat briefly on why offshore drillers moved so rapidly yesterday.
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Offshore oil drillers had a strong day yesterday with most of the stocks up high single digits. If you are new to Grit Alpha, the offshore drilling industry is one of my favorite capital constrained industries and I think the entire industry will perform extremely well over the next 2-5 years.
The reason for the aggressive move in offshore drillers yesterday was the recent contract award that Transocean (RIG) announced. Per the announcement, Transocean stated that one of their three drillships, Deepwater Invictus, Deepwater Thalassa, and Deepwater Proteus, will be selected as the independent operator on a 1,080-day contract in the Gulf of Mexico with a total contract award of $518 million. This contract has a day-rate value of $480k per day and does not include any mobilization fees.
Even better, the contract is expected to commence in the fourth quarter of 2025 and the second quarter of 2026 and has semiannual cost adjustments (inflation adjustments).
“This award is especially encouraging on numerous fronts,” said Chief Executive Officer Jeremy Thigpen. “The fact that our customers are securing rigs well in advance of their programs and committing to long-term contracts clearly demonstrates the tightness of the market. Additionally, our ability to designate the specific rig closer to the commencement of the program provides us with increased flexibility to optimize the utilization of our high-specification fleet of ultra-deepwater drillships.”
This contract is extremely bullish not only because the day-rate is $480k per day, not counting into mobilization fees which can be in excess of $25 million, but it shows how tight the offshore market is. In fact, a company signing contracts for a deepwater rig into 2025 and 2026 shows they are worried they might not have supply in those years and are paying top dollar. In addition, it also indicates that day-rates on offshore rigs could move up even more in the near-term, adding additional operating leverage.
Citi recent put a $9.50 price target on Transocean. I think that price target is generous and over the long-term if Transocean is able to contract their entire fleet in excess of $500k per day we can see a stock in the $15 dollar range.
Transocean (NYSE:RIG) +4.3% in Wednesday's trading as Citi upgraded the stock to Buy from Neutral with a $9.50 price target, anticipating meaningful EBITDA growth and free cash flow expansion in the coming years given dayrate appreciation and declining capex levels.Citi forecasts EBITDA nearly doubling from ~$970M this year to $1.88B in 2025, as well as slightly positive free cash flow this year to $800M in 2024 and $1.16B in 2025; with this meaningful step-up in FCF, Transocean (RIG) "should have strong debt to equity conversion as it pays down its sizable debt, and as a result of this conversion, the multiple on the stock should expand," according to analysts including Nikhil Gupta.The group also said offshore oil and gas spending can recover to 2017-18 levels, driven by activity levels in Guyana, Brazil and Namibia, and in the Middle East.
I am long Transocean (RIG) and will buy or sell my shares anytime following this article. This is not investing advice. Do you own research.
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