Transocean Eyes $85 on Deepwater Drilling Demand in Brazil & Africa

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Transocean ( RIG ), the world's largest provider of offshore drilling services, will have a total of eight of its ten ultra-deepwater and deepwater rigs in Brazil and Africa. These rigs will be working on projects for a number of customers such as Petrobras, Anadarko, ( APC ) Devon and Exxon Mobil ( XOM ) over the next few months according to its latest fleet update. The company's fleet positioning is a good indicator of spending on deepwater exploration in these regions. Transocean competes with other offshore drillers such as Diamond Offshore ( DO ), Hercules Offshore ( HERO ), Seahawk Drilling (HAWKQ), ENSCO International (ESV) and Rowan Companies (RDC).

We have a $85.70 price estimate for Transocean, which is almost a 40% premium over its current marketprice.

Brazil to Lead in Deepwater Capital Expenditure

In a report published last year, E&P estimated that 38% of the capital expenditure on deepwater projects will be concentrated in Brazil and that Petrobras, the state-owned oil firm, will dwarf competitors such as Statoil, BP, Exxon Mobil and Chevron in deepwater production. Brazil has approximately 12.9 billion barrels of proven reserves and more than 90% of its present production is from offshore fields.

E&P also reported that Petrobras will continue to remain dependent on deepwater production in the future as approximately 90% of its new output comes from deepwater sources. The company's production is expected to peak at 1,700 million barrels of oil equivalents per day (MMboe/d) around the year 2017.

Most of the country's reserves are concentrated in the pre-salt zone that occurs 18,000 feet below the ocean's surface. These challenging conditions will necessitate the use of high-specification rigs - which would increase revenues for Transocean due to higher rates charged per day for these rigs.

Deepwater Exploration in West Africa

In contrast to Brazil, where most exploration activity is dominated by the NOC (National Oil Company) Petrobras, deepwater spending in West African countries such as Angolia, Nigeria and Ghana is dominated by oil majors such as BP, Exxon Mobil, Chevron and Shell. Recently, independent players such as Anadarko and some Indian and Chinese firms have also made forays into this market as well.

Although investments in these countries have been hampered in the past by uncertain uncertain political environments, deepwater production will continue to grow in several countries such as Angolia, Ghana and Equatorial Guinea. We expect the deepwater exploration in these regions to positively impact Transocean's revenue outlook in the future.

Click here for our full analysis of Transocean .



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: APC , DO , HERO , RIG , XOM

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