Fleet age a key factor in rising Transocean costs

Thu Nov 3, 2011 1:38pm EDT

(Reuters) - The early move by Transocean Ltd (RIG.N) (RIGN.VX) into deepwater drilling is now translating into relatively higher costs for the industry leader as its rigs need to meet tougher regulatory standards for equipment.

Ballooning maintenance costs contributed to the sixth straight quarterly disappointment from the offshore drilling contractor, and its shares tumbled nearly 13 percent on Thursday as concerns crept in about its dividend as well.

Shares of rival Ensco Plc (ESV.N), with a largely brand-new ultra-deepwater fleet, rose sharply after its third-quarter results came in ahead of expectations.

An Ensco executive also reported no significant problems in getting its fleet to meet new equipment standards, which have been tightened in response to the Gulf of Mexico disaster in April 2010 that destroyed Transocean's Deepwater Horizon.

Transocean Chief Executive Steven Newman said his company's "historical leadership" in deepwater drilling meant its older rigs bore a disproportionate amount of the cost of stronger regulations.

"Two-thirds of our fleet comes from prior newbuild cycles. As far as the peer group is concerned, only one-third of their fleet comes from prior newbuild cycles," Newman told analysts on a call to discuss quarterly results.

"Everybody else is a bit later to the game than we are."

Newman also said it was taking longer to get equipment certified by original manufacturers such as Cameron International Corp (CAM.N), National Oilwell Varco Inc (NOV.N) and GE Oil & Gas (GE.N), because their facilities were overwhelmed with getting so much work all at once.

While Transocean started with maintenance and equipment certification work on its lucrative ultra-deepwater fleet, next year it would focus on rigs that work in shallower waters.

Chief Financial Officer Ricardo Rosa said this would mean less of a revenue hit, even if the work cost the same or more, and he offered "highly preliminary" operating and maintenance expenses guidance for 2012 of $6.2 billion to $6.5 billion.

This would be an increase from 2011, when he expected comparable expenses of $5.8 billion to $6 billion, which is up $200 million from previous guidance, and represents the second increase in 2011 cost guidance in three months.

Both Newman and Rosa fielded questions on the outlook for Transocean's dividend given the rising costs and its recent $1.4 billion takeover of Norway's Aker Drilling, and their less-than-assured answers led to a further drop in the stock.

Newman said board discussions would begin on the dividend in the next few weeks, with a final decision in February.

"We have indicated that we are committed to a sustained dividend," Rosa said. "But clearly we have to take all of the externalities into account."

Analysts differed in their interpretations of Transocean's adjusted third-quarter earnings per share, excluding one-time items, but some put the figure in the range of 23 to 27 cents. Analysts on average had expected 77 cents, according to Thomson Reuters I/B/E/S.

Ensco earned 87 cents per share in the quarter, compared with the average estimate of 82 cents.

Shares of Transocean, which had already lost a fifth of their value in 2011, were down 12.8 percent at $48.84 in afternoon trading on the New York Stock Exchange. Shares of Ensco, which had been down 9 percent this year, were up 6.7 percent at $52.10.

Diamond Offshore Drilling Inc (DO.N) managed to beat profit estimates last month, though partly at the expense of its fourth quarter, while rival Noble Corp (NE.N) overcame disappointing numbers with an upbeat outlook.

(Reporting by Braden Reddall in San Francisco, editing by Matthew Lewis)