Transocean: Deep Value in Deepwater Drilling
Localized monopoly characteristics trading at a fraction of intrinsic value
“Offshore platforms are extremely expensive and, again for obvious reasons, no one is going to be replacing them. At some point, with their version of localized monopoly characteristics, they will have both increase demand and pricing power, and outperform, too.”
- Horizon Kinetics, 4th Quarter Commentary, January 2024.
The above excerpt is a compelling and succinct description of the thesis I hope to outline in this article. Transocean, Ltd. is an offshore oil and gas drilling company operating a fleet of 26 ultra-deepwater (UDW) floaters and eight harsh environment (HE) floaters. The UDW fleet consists of the only two 8th-generation drillships in the world, the newbuilds Deepwater Titan and Deepwater Atlas, along with a high-spec fleet of 6th/7th-gen floaters employed primarily in the deep waters of the U.S. Gulf and Brazil. Transocean’s harsh-environment floaters operate in oligopoly-esque markets such as the Norwegian North Sea, where demand for their services continues to accelerate against a shortage of competitive rigs capable of operating in the region.
The offshore drilling industry has been completely transformed over the past decade through an unprecedented combination of rig attrition, industry consolidation, and capital restructuring. These factors, combined with the barriers to entry provided by the sheer price tag of an offshore drillship, have set up the industry to earn sustainably high returns on capital for the foreseeable future. In this write-up, I will elaborate on these key points and discuss how Transocean, trading at just a fraction of its intrinsic value, is in an optimal position to take advantage of this revitalized offshore market.