In the last article, we saw that Transocean’s (RIG) revenues will likely tumble downhill. In such a scenario, the most important thing for any company to do is manage its costs and try to preserve its cash as much as possible. In this article, we’ll see what steps Transocean is taking to cut costs.
Amid a lack of rig demand, companies are forced to scrap older rigs to reduce costs and preserve capital. Rigs without contracts don’t earn revenue but incur costs. Transocean leads the industry in rig scrapping. It has scrapped 24 rigs since the downturn began and plans to scrap another eight to ten rigs over the next 12–18 months.
Transocean has reduced its costs significantly by scrapping rigs. On the other side of this, the company with the most rigs scrapped will be left with the fewest rigs once the industry has recovered from the downturn.
Transocean is not the only company to scrap rigs. Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Rowan Companies (RDC), Seadrill (SDRL), Ensco (ESV), and Noble (NE) have also scrapped rigs to manage costs.
Other cost-saving measures
Transocean has stacked 21 out of 27 rigs that are out of contract. Generally, when an offshore drilling (IYE) company does not have work prospects for a rig for a long period and it wants to significantly cut its costs, it cold stacks the rig.
In cold stacking, all the rig crew is laid off, and almost all fixed costs are avoided, except for insurance. Transocean has reduced 60% of its costs from 2013 on rigs out of service. The company could reduce riser inspection and riser costs by 25% per unit from 2014.
2016 cost guidance
Transocean expects its 2016 operating and maintenance expenses to range between $2.2 billion and $2.5 billion. This level is 12% lower than its earlier expectations. This 2016 guidance is 40% lower than its Macondo-adjusted 2015 operating and maintenance costs.
70% of the reduction is associated with reduced activity and lower cold stacking costs, and about 10% of the reduction is associated with lower out-of-service costs. The remaining 2016 operating and maintenance costs are related to more streamlined operating and overhead support models.