These Stocks are Collecting Sweet Cash on Higher Rig Rates

A surge in ultra-deep-water drilling rig rental rates could mean the tide is about to turn for Transocean Ltd. (NYSE:RIG). The world’s largest offshore rig owner has seen hard times in the stock market since its Deepwater Horizon rig famously burned and sank causing the 2010 Gulf of Mexico oil spill, but it now is poised to gain the most from increasing demand.

Rates to lease ultra-deep-water rigs, the most high-tech and expensive offshore drilling vessels in the world, are expected to jump 28 percent by the third quarter to an all-time high of $714,000 per day from the current rate of $560,000 per day, said a Bloomberg report, which cited estimates by Morgan Stanley analyst Ole Slorer.

The Switzerland-based Transocean stands to win big in this environment because it will have more units available for leasing this year than its competitors. This puts Transocean in a better position to equip companies such as Exxon Mobil Corp. (NYSE:XOM) and BP Plc (NYSE:BP) with rigs as they explore for oil in some of the deepest oceans in the world.

Transocean Chief Executive Officer Steven Newman told investors at the Howard Weil Energy Conference in New Orleans on March 26 that the company has a “very, very robust” long-term outlook for the ultra-deep-water industry. He said demand will only increase as explorers are forced to reserve units further in advance, Bloomberg reported.

On March 15, the company announced a surprising two-year contract with an unnamed operator at a rate of around $650,000 per day. The rate could increase to around $695,000 per day if the renter decides to continue the lease after the initial two-year period, according to said Charles Minervino, an analyst at Susquehanna International Group. The record, set in 2011 by an undisclosed owner, is $703,000 a day, according to IHS Petrodata.

Transocean stock has led the industry this year with 43 percent growth. This brings its loss since the April 20, 2010, oil spill down to 41 percent, but still leaves the company with the biggest decline of any offshore company during that period.

To contact the reporter on this story: Gina Smith at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com