Current financial market could prove positive for Transocean

The potential impact from the lower price of oil and the current financial crisis is the talk of the offshore oil and gas industry.

Tracy Dulle
Technology Editor,
Surface Systems & Vessels

HOUSTON -- The potential impact from the lower price of oil and the current financial crisis is the talk of the offshore oil and gas industry. Transocean, the world's largest offshore drilling contractor, continues to see interest from operators, and to achieve attractive rates, at least in deepwater, CEO Bob Long said today during the company's 3Q earnings conference call.

"In regards to the price of oil, I think most deepwater projects are economic at $60 oil and we have seen no change in interest from our customers regarding additional deepwater capacity or renewal of existing deepwater capacity," Long said.

There are even some positive aspects of the current environment for Transocean.

"For example, the combination of a softening labor market, a slowing or stopping of newbuild orders, a stronger dollar and collapsing commodity prices, including steel, should result in some pullback in cost escalation," Long said. "We might also see some cancellations in newbuild orders, which would be good for us and for our industry."

Drilling in shallower water could be cause for concern though.

"In the mid-water floater and jackup business, there are some areas, like the North Sea, where I expect $60 oil may have some impact on the margin given the small reserve size and the number of smaller players, but in the big picture, I think that the overall impact on our business will not be significant if oil stays at or above $60."

Although earlier in the year, Transocean was optimistic that day rates might reach $700,000 this year, the company is no longer hopeful.

"I haven't given up hope that we might see them next year. I am not sure in terms of the commodity price that -- we haven't seen any impact on the supply/demand situation, particularly deepwater, from what has gone on in the markets here recently," Long said. "So I am not sure that an oil price in the $65 or $75 range is going to have much impact on whether or not that day rate barrier is ultimately achieved.

"I think it is going to be a supply/demand situation and right now, the psychology is certainly weighing on the market. With all the uncertainty going on as a result of the financial markets, as well as the pullback in the oil price, operators are certainly pausing and they are using this environment as a reason to negotiate very hard. So our ability to push day rates higher in the near term I think is going to be a bit difficult. But longer term, we still see the fundamental supply/demand situation for deepwater to be very, very good."

Over 70% of Transocean's backlog is with A-rated companies or NOCs, and about 90% with the investment-grade companies, Long said, alleviating any concern about the risks that their customers will be unable to fulfill or seek to avoid fulfilling their payment commitments represented by the backlog.

11/07/2008

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