Norway Sends Transocean to the Arctic as Production Declines

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Transocean Ltd. (NYSE:RIG) is the world's largest provider of offshore drilling services for oil and gas wells and it competes with players such as Diamond Offshore ( DO ), Hercules Offshore ( HERO ), Seahawk Drilling ( HAWKQ ), ENSCO International ( ESV ) and Rowan Companies ( RDC ). Transocean also operates one of the most modern and versatile mobile offshore drilling fleets in the world that can function in challenging environments such as the North Sea. We have a $85.70 price estimate for the company, which is roughly at a 36% premium over its current market price.

Push Towards More Exploration in Norway

Norway is the largest producer of oil and gas in Western Europe producing around 230 million standard cubic meters of oil equivalents in 2010. However Norway's status as one of the world's leading producers of oil is being threatened by the rapid declines in oil production from its mature wells. The discovery of resources has lagged production ever since 1997 and this is leading to a steep reduction in the remaining reserves. The oil industry contributes to 25% of the country's GDP and to keep the sector from declining, the government of Norway is encouraging offshore explorations in its northern territories.

Norway expects new oil & gas finds in the Barents Sea region of the Arctic to offset some of the decline in its oil & gas output. This region could hold close to 6 billion barrels of oil that have yet to be discovered. The recent discoveries by Statoil (STO) in the Barents Sea have fuelled new interest in exploration activity in the Arctic regions of Norway, leading to record levels of drilling in 2011 with 4 additional wells planned this year and 7 more in 2012.

The Norwegian Petroleum Directorate expects investments exploration and production costs to keep increasing through 2013, which will directly result in higher revenues for providers of offshore exploration and drilling services. The settlement of the border dispute with Russia has also boosted exploration efforts.

Transocean's activity in the North Sea and beyond

As of February 2011, Transocean had 5 of its units drilling in Norway. Earlier this year Statoil contracted semi-submersible 'Transocean Leader' over the next 3 years to carry out drilling at depths below 1,500 meters. Only rigs with very high specifications can operate in the demanding climatic conditions of the Arctic.

Presently fleets in the North Sea are working at utilization rates of 87% while the utilization rates languish at 50-65% in some other parts of the world indicating that the market of high specification rigs is under-served. Transocean intends to capitalize on the situation by significantly expanding its fleet high specifications rigs over the next few years.

The expected higher utilization of rigs in the Arctic as well as the higher day rates from operating in the harsh environment have been taken into consideration for our revenue expectations for the company. Our forecasts for these factors are presented above.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: DO , ESV , HAWKQ , HERO , RDC

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