Transocean's 'Midlife Crisis'

In a report published Monday, Cowen and Company analyst J.B. Lowe discussed Transocean LTD (NYSE: RIG)'s "midlife crisis," in which the company's 12 UDW floaters built roughly 15 years ago are either stacked, idle or will off-contract before the end of next year.

Lowe continued that Transocean "by far" has the largest fleet of vintage (fifth generation) floaters in the global offshore rig industry. The analyst added that the fate of these rigs represents "the largest source of uncertainty" for the company's future cash flow and puts into question the company's results through the end of 2017.

The Rigs

Lowe is modeling the company's five stacked rigs will remain stacked through the end of 2017, along with the currently-idle Sedco Energy. The analyst also is modeling the currently idle Discoverer Enterprise and Deepwater Frontier will remain idle through the end of 2015, with 50 percent utilization over the next two years. Meanwhile, the Deepwater Millennium is set to roll off a contract in April 2016 in Australia and will be a "strong contender" for incremental work in 2016.

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In addition, the Cajun Express rolls off a contract in West Africa this year, but could also secure follow-on work (although at a materially lower rate). The Sedco Express likely just completed a contract in Nigeria, and the analyst is modeling a 50 percent utilization rate going forward. Finally, the Discoverer Deep Seas is contracted through late 2016, at which point it will likely be utilized at 50 percent in 2017.

Material Upside

With that said, the analyst stated that any "material" upside surprise on the contracting side will come from these units that are already assumed to have a "relatively low level" utilization rate. On the other hand, if all of these units are unable to be utilized through the end of 2017, the analyst estimated the negative impact to EBITDA would just be 3 percent in 2016 and 5 percent in 2017.

"In short, we believe much of the downside risk associated with these 12 ‘middle-aged' rigs has been priced into the shares," Lowe argued.

The Bottom Line

Transocean shares have "longer-term potential" if the company is able to: 1) continue seeing success in eliminating costs, 2) successfully contracts floaters with 2016 and 2017 availability, and 3) continues to upgrade its fleet through "prudent" investments and "opportunistic" divestitures.

Shares remain Market Perform rated with an unchanged $12 price target.

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