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RIG - Transocean


phil_Buffett
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  • 1 month later...

I would be very careful with investing in ORIG's equity.  If going down that route, there are many related party transaction notes that need to be read, and one would need to spend hours reading about George Economou and Cardiff Marine first.

 

Everyone has alot of issue with George Economou, and his Drys and prior business dealings.

Will have a look though at his interaction with Cardiff Marine though, first time I have heard that name.

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George Economou is pretty sketchy.  He trades against his shareholders and is paid a little too much relative to the value he generates.

 

However, he's worth watching to see the moves that he makes.  He seems to be a smart guy and has the right idea in what areas of shipping to get into and what areas to get out of.  It was a few years ago when it was a good idea to get into ultradeepwater drilling rigs.  Now they're hot, which is why Oceanrig was IPOed/spun off from Dryships.

 

I generally dislike the shipping industry because the economics aren't very good.  It's a commodity industry where it's very difficult to create value.  Also, many of the management teams are overpaid and don't treat their shareholders that well.

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Shipping and offshore drilling is a rather peculiar industry in that it’s capital intensive, incredibly volatile, and has minimal entry barriers. 

 

What’s interesting is how many billionaires are involved as control shareholders.  Among others, the Tisches, Fredriksen, Ofers, Moeller-Maersk group, Hsin-Chi Su, and Economou.  The last two tend to cause a bit of indigestion with shareholders on related party concerns.

 

If you look at all the players in the offshore drilling space, I suspect the Tisches and Fredriksen have had the best on return on their equity investments by far and these are ‘genuine’ profits, not money made by extracting it from minority shareholders. 

 

They’ve both pursued basically polar opposite strategies – the Tisches allocate very little capital to the space except during the doldrums (late 1980s / early 1990s as I recall) with small exception in very recent years, they’ve basically harvested the business and let rigs age, returned cash to shareholders, maintained low debt, largely kept to themselves and so forth.  Fredriksen has basically piled into the space since mid 2000s, rapidly invested in newbuilds, constantly accessed markets, maintained high leverage, been very vocal and invested as a control player in many rivals’ equity and debt, etc.  Opposite ends of a barbell in my view. 

 

As best I can tell, Icahn is nudging Transocean out of middle and toward the Seadrill end of things.  It’s hard to figure out how this one will turn out given the operational issues RIG has had for the past few years, but having someone on RIG’s board with skin in the game seems to be a step in the right direction.

 

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Shipping and offshore drilling is a rather peculiar industry in that it’s capital intensive, incredibly volatile, and has minimal entry barriers.

 

 

Minimal Entry barriers??? Are you serious?

 

 

It takes Billions of dollars to operate offshore rigs (especially deep-see rigs like Transocean). Aside from the huge initial cost in the equipment itself, most rigs cost around $200,000-$300,000 a day to operate. Pretty sure there's a lot of licensing involved as well. You can't just go drop deep see oil rigs wherever you want.

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Seadrill was founded in 2005 and has a $5B cap according to....

 

http://en.m.wikipedia.org/wiki/Seadrill

 

Pretty impressive for a "high barrier to entry" business.

 

 

I don't know a ton about Seadrill, but on their own website, they appear to have been born out of another company that existed since 1972:http://www.seadrill.com/timeline/index.html

 

 

 

 

-Let me know if you track down a bunch of free deep-sea oil rigs lying around and we can start our own drilling company.

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If I went to the capital markets with a plan to raise $20B to start a drilling company, that would be relatively straight forward. Happens all the time. Look at McClendon and Ward - both have already raised capital to start a new capital intensive business.

 

If I went to the capital markets for $20B in order to start a Coke equivalent, I would get laughed out of the room. No reasonable amount of capital can take down Coke's moat, whereas anyone can raise capital to take on RIG.

 

THAT is a barrier to entry.

 

You ever see the show Shark Tank? Kevin almost always asks why he should invest in a particular business when he could take the same amount of money and just go start a competing business himself. Same thing.

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Shipping and offshore drilling is a rather peculiar industry in that it’s capital intensive, incredibly volatile, and has minimal entry barriers.

 

 

Minimal Entry barriers??? Are you serious?

 

 

It takes Billions of dollars to operate offshore rigs (especially deep-see rigs like Transocean). Aside from the huge initial cost in the equipment itself, most rigs cost around $200,000-$300,000 a day to operate. Pretty sure there's a lot of licensing involved as well. You can't just go drop deep see oil rigs wherever you want.

 

First thing, in my view capital is not much of an entry barrier.  If something has a cost say > $100Bn, maybe it can be considered a formidable entry barrier, but otherwise, not so much.  In addition to what bmichaud said about capital markets, in the energy space in context of capital, I would always ask is this a project Exxon could do?  Chevron?  Schlumberger? And so on…  Buying a rig for $500MM - $800MM is well within their capex capabilities if they thought doing so was attractive.  (The opex per day # is a bit of a red herring, btw, because at a high level, a driller will always stack a rig unless it has a fixture with a dayrate > opex) 

 

In fact Schlumberger used to have an offshore drilling unit but it spun that off (Sedco Forex).  Generally SLB keeps businesses that have high entry barriers and are not particularly capital intensive.  Sedco Forex was then merged into Transocean, btw. 

 

I would also note that the economics of offshore drilling are quite similar to those of shipping and real estate.  The biggest difference by far amongst the three is real estate assets are not really mobile in nature and hence all of the analysis of value associated with land and the potential for entry barriers there.  It should not be a surprise that Frederiksen, Economou and Ofer all had major shipping fleets that they ran before entering the offshore drilling business in the 2000s.  That said, drilling, particularly ultra deepwater, has by far the highest technical element to it, but as a first level consideration that doesn’t really change the economics.  (As a second level consideration it makes it very challenging to decouple management from asset ownership in offshore drilling ala the old Host Marriott and Marriott International model.)

 

I think in a post DWH word its not so easy to start a drilling company.

 

The comment, roughly put, that post Macondo everything is different and new small companies won’t be trusted going forward is an interesting one—and one you’d hear a lot from large drillers and perhaps other large OFS and E&P companies.  Research sometimes repeats this for good measure.  People making those comments generally ignore a bit of the irony that BP and Transocean were at the core of the Macondo blowout and they were two of the largest players in their respective subsectors.  And as best I can tell, dysfunctional bureaucratic incentives and processes were core to the disaster.  In the past, in pretty much every industry upswing, new entrants have found their way into the industry.  Time will tell going forward, though it is worth noting that Shelf Drilling was created as a new competitor when RIG sold it a bunch of jackups a year ago—not UDW, but still a data point. 

 

And keep in mind Exxon, SLB, and many other large players in the energy industry could ‘enter’ the offshore drilling market themselves if they so chose by developing the capability internally. 

 

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  • 2 weeks later...

Capital allocation record at RIG has been questionable at best over the past few years.  See large dividend instituted post-Macondo, only to then to be cut completely a year or so later.  Also acquired Aker Drilling for ~$1.5B in mid-2011 at a huge premium, then issued $1B new equity in low $40s in Nov'11 (lowest share price in years) to dilute existing shareholders.  Macondo was  no doubt a huge distraction for management, but these events are inexcusable for a management team that was previously well regarded in industry.    I wasn't involved at the time, but it is now pretty clear they massively overpaid for GlobalSantaFe in '07 as well.

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Capital allocation record at RIG has been questionable at best over the past few years.  See large dividend instituted post-Macondo, only to then to be cut completely a year or so later.  Also acquired Aker Drilling for ~$1.5B in mid-2011 at a huge premium, then issued $1B new equity in low $40s in Nov'11 (lowest share price in years) to dilute existing shareholders.  Macondo was  no doubt a huge distraction for management, but these events are inexcusable for a management team that was previously well regarded in industry.    I wasn't involved at the time, but it is now pretty clear they massively overpaid for GlobalSantaFe in '07 as well.

 

In my view most of the independent offshore drillers (there are relatively less of them these days, but the likes of Rowan, Transocean, Ensco, formerly Pride, and a few others) have done a terrible job at capital allocation, much to the detriment of their Outside Passive Minority Investors.  This goes above and beyond acquisitions, though, even their newbuild capex was very questionable over time.

 

Btw-- your point on the RIG dividend is not quite right.  Newman became CEO in March 2010, and he basically immediately announced intent to pay a dividend.  Then on April 20, 2010 Macondo happened.  There was a bit of a delay in paying the dividend from this time due to obscure Swiss rules, but Newman's commitment to the dividend was tied in before Macondo -- very bad timing. 

 

The Aker Drilling acquisition was extremely questionable.  I thought it was very imprudent when it was announced, though I remember feeling a bit in the minority at least relative to what the research and banking community was saying at the time.  That plus the subsequent panicked $1Bn equity issuance led to the CFO being pushed out.  If one was going to make a Bull Case for RIG, it would be that having Icahn on the board, and Talbert off of it, will reign in these poor decisions (which to me look like a series of half measures) going forward.

 

GSF is a bit of a harder case to analyze as it was largely a stock deal so relative valuations are a consideration.  Long was the CEO back then, with Talbert Chairman.  The industry chatter (which may or may not be true) has been that RIG skimped on maintenance expenses and capex subsequent to the deal, and that contributed to its operational problems in recent years.  One other thing worth noting is that RIG had a very high stock price (>$100/share) at the time of the GSF deal, and the deal was structured as a merger of equals so that both company's managements' stock options vested at the consummation of the deal. 

 

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  • 3 months later...

I'm no expert, but I think fracking will become increasingly less competitive vis-a-vis offshore as the easiest wells dry up and costs to produce an incremental barrel onshore increase. That being said, all of the offshore guys have seen their free cash flows incredibly squeezed in the last year. I haven't read through any of their 10Ks, but anyone have any insight on what's causing this?

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I'm no expert, but I think fracking will become increasingly less competitive vis-a-vis offshore as the easiest wells dry up and costs to produce an incremental barrel onshore increase. That being said, all of the offshore guys have seen their free cash flows incredibly squeezed in the last year. I haven't read through any of their 10Ks, but anyone have any insight on what's causing this?

 

In world oil markets fraccing is the 800 lb gorilla in the room.  Its all about relative ROIC and fraccing has excellent numbers.  Decline rates for fracced wells i respectfully submit are a red herring.

 

Fraccing has added several millions of bbls/day production to world oil supply in just a few years, changing world oil market dynamics.  And all that has just been from North America, with most coming from the US.  What about other shale plays in the US and the ROW where we haven't even scratched the surface yet? 

 

The major offshore drillers see the current world oil prices and expected increases in onshore supply from fraccing and suddenly dayrates need to drop $200,000/day for their pro formas to work.  Not a pretty picture for offshore drillers.

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  • 2 months later...
  • 4 months later...

Given the recent annihilation in the offshore drillers, I thought I would bump this thread.  What is the thinking about offshore drillers at this point? 

 

An interesting data point is the following (Obviously, this is not RIG but RIG has traded more or less in line with ESV recently):

 

http://www.enscoplc.com/Newsroom/Press-Releases/Press-Release-Details/2014/Ensco-Prices-125-Billion-Offering-of-Senior-Notes/default.aspx

 

So, it seems to me that there is a real disconnect between equity market values and the debt market pricing.  Does anyone have any thoughts here?  How can the debt market buy 30 year paper at 5.75% from a credit that is going bankrupt? 

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With the deluge of new builds coming, it should be interesting to see how this all shakes out.  I have a position in RIG and in Awilco Drilling so the last two weeks have been somewhat painful.  I will say that in general, the folks that are levered up are going to have the most challenges with this environment.  You can only lower the rig's day rate so far before you can no longer cover your debt payments and operating costs.  Thus I give the advantage to companies like Awilco with minimal debt and upgraded rigs...in an environment of declining rates, they have the ability to accept reduced day rates and still turn a profit...I am not so sure higher leveraged companies like SeaDrill can do the same. 

 

I also agree with one of the earlier comments regarding shale plays.  Onshore companies are drilling out the easiest wells with the highest IRR's first.  As they move through their drilling inventory, wells are going to exhibit a lower IRR, mitigated by higher recovery rates as shape techniques improve.  I guess what I am saying is that shale will not result in the death of the offshore drilling companies.

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