Transocean Report, Guidance, and Outlook

I think the highlights of what got reported for Q3 are known here.  

RIG lost an adjusted $69 million or 11 cents a share.  EBITDA was plus $338 millionand revenue
efficiency was 96%... amazing, given Covid interruptions and indicative of how quickly they resolve
issues.  Despite the industry bear market, this company is very well managed.

Operating cash flow was $81 million... down just a few million from Q2.  

Of particular interest to me, was what they did with that cash flow, and I liked what I saw.
About $37 million of it went toward their 2, newbuild drillships about $18 million went 
toward maintenance CAPEX, leaving around $26 million potentially as "free" cash flow.

So, they used that extra cash to augment their efforts to extend the maturities on their debt.
Most of the debt extensions involve debt swaps but it was advantagious to purchase some of
the nearer-dated debt for cash from some debt-holders most resistant to the swaps.  In total,
they spent about $49 million buying debt that was discounted enough to save $20 million 
against nearer-term par maturities

VIA the debt exchanges, they reduced their total debt by almost $1 billion without spending any 
cash to do it.  Of course, the downside of swapping near-term discounted debt for new debt 
with maturities further out meant taking on higher interest debt servicing costs, but by using 
the $49 million cash to buy debt, they mitigated much of that increased servicing cost from the
swaps.  

With Q2 and Q3 being better than expected, RIG's liquidity stands at $2.9 billion ($1.6 billion 
cash and $1.3 billion un-drawn credit lines).  The biggest concern for liquidity is the bigger cash
expenditures on the newbuild drillships that are necessary in 2021 and 2022, which are projected
to cut liquidity in half when conservatively estimating operating cash flow as they do. 

Their backlog is $8.1 billion of work... easily by far the best backlog in the industry, but currently
shrinking by around $600 million per quarter so bidding activity and potential new contracts takes
on additional importance as the backlog is slowly monetized.   

So... most interesting, is that bidding activity on new contracts rose substantially from Q2 to 18 total
bidding participations during Q3, which was actually equal to bidding
activity in Q4, 2019 before Covid arrived.  Their interpretation of that is that
they'll likey be contracting much more by late 2021, and that seemed to be the main
driver behind the stock's surge from Q3 results/guidance.  

Bottom line, the CEO stated 2, important things:  1) "Transocean is in a very different and advantageous
position relative to our competitors as we are not currently facing a restructuring decision nor are we
experiencing the difficult and demoralizing/crippling distractions associated with such a process";  
2) "(The) marketable supply of (industrywide) rigs is likely to fall at a pace that we expect will 
eventually meet with the contracted rig count, which we are already starting to see.  Therefore, when
oil prices stabilize at more favorable levels, an inflection in rig contracting should have an almost 
immediate and positive impact on dayrates, due to the shortage of marketable rigs and the significant
expense associated with reactivating (cold) stacked rigs".

It's that second comment, about a supply/demand "inflection" point that is key to this company's upside.
In oil production (like Exxon or Chevron), a bump in oil prices from $40 to $50 is likely met with increased
OPEC production, limiting the revenues to just that price bump.  But to the extent that such a bump 
increases rig demand to such an "inflection" point and available rigs become scarce, the "dayrate" on good
rigs can double inside of a month's time, and accounts for the particularly boom/bust characteristics of a
driller like RIG. 

An important aspect to competing with restructured (eg: went through bankruptcy) competitors is that they
often have less debt to service and will discount their rigs in the contract bidding process.  Those competitors 
are more incentivized to get their rigs working at lower profit margins in order to get through the bear oil 
market without further bankruptcy problems.    The upside, however, is that bankruptcy often forces scrapping
or cold-stacking more rigs, so once they have their active rigs working, they're out of the market for further 
bidding since bankruptcy generally deplete's such companies cash so severely that they can't afford to 
activate cold-stacked rigs to meet further demand as readily as Transocean can opportunistically do with their
liquidity.  It can cost upwards of $15 to $40 million to activate a cold-stacked rig and a restructured company
isn't going to be able to do that easily until oil prices recover substantially, leaving Transocean in the drivers 
seat for such reactivations when oil's between $45 and $55 a barrel... particularly since Transocean's highly-
maintained and state of the art rigs can command higher dayrates to some extent due entirely to quality, 
trust and capability. 

Finally, aside from the Q3 stuff, some important macro data.  We all know about the headwinds to oil...
electric cars, working from home, etc. and, as I've said, I see these as gradual, long-term trends that should
significantly exceed the current "cycle".  There's also Joe Biden, who could help offshore drilling by trashing
the onshore shale frackers... but who also could hurt oil by easing up on Iran and letting them export lots of oil
and build nuclear bombs again.

But another thing to note, are the increasingly tight, global restrictions on emissions, and the resulting restrictions
on high-sulfer content and/or heavier crude oils.  That's actually good news, because a much higher percentage of
light, sweet crudes are in viable offshore reservoirs.  In South America, for example, on-shore fields in Peru, 
Columbia, Equador, and the granddaddy of them all, Venezuela, are mostly all heavy, sour crudes.  But go offshore
to the massive, pre-salt, deepwater fields off Brazil or the new, exciting offshore finds off Guyana, and it's all light, 
sweet crude that the refiners all want.

And that's mostly true world-wide.  Older, offshore fields off Nigeria are extremely light crude known as Bonny Light.
The north sea, where most of Transocean's harsh-water rigs are working, is also lighter crudes, and Norway is 
implementing very big financial incentives for oil companies to drill due to the Covid pandemic (basically the opposite
of what Biden and AOC want to do in America).

Anyway, that's about it for this posting.  Any questions or commentary in this thread is welcome.   

S