Transocean Pumps To $59 Despite Softer Earnings

by Trefis Team
+8.30%
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42.52
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Trefis
RIG
Transocean Limited
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Transocean (NYSE:RIG) came out with its Q1 earnings on May 2nd, reporting a 4% sequential decline in revenues. [1] However, with its strong operational performance and the improving outlook for offshore drilling the company appears to be on the path to recovery after the Gulf of Mexico moratorium took its toll on the industry. Last year, the offshore driller was hit by higher than expected downtimes and maintenance costs as it upgraded its fleet to meet stricter regulations following the Macondo incident. However, with renewed interest in deepwater drilling, we expect Transocean to deliver a strong year going ahead. Oilfield services players like Baker Hughes (NYSE:BHI) should also benefit from the upturn.

We have a $59 price estimate for Transocean, which is more than 20% ahead of the current market price.

Click here for our full analysis of Transocean.

Offshore rebound

Persistently high oil prices are pushing major oil companies to redouble their efforts to explore deepwater resources across the world. Major players are counting on offshore projects in Angola, Brazil and the Gulf of Mexico to boost flagging output levels. Low gas prices in the U.S. are also shifting attention away from onshore shale exploration, forcing companies to focus on oil exploration. Activity is also picking in the U.S. Gulf of Mexico, where oil companies plan to boost rig counts over the coming year. All of this bodes well for the offshore drilling industry in general and Transocean in particular. The company has secured contracts worth $1.26 billion since its last fleet update report in mid-February.

Cost cuts boost margins

On the operational side, the company managed to lower its operating and maintenance expense to $1.41 billion from $1.57 billion in the prior quarter, adjusted for legal expenses. High maintenance costs were a major issue with the company’s results last year as its fleet had to be upgraded to meet new regulatory requirements. About $70 million of the cost reductions came from lower maintenance activity. Transocean also managed to slash selling and general expenses from $88 million in Q4 2011 to $69 million in the first quarter. Overall, we expect the company to deliver strong results over the next few periods because of demand for ultra-deepwater and high specification rigs.

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Notes:
  1. Transocean Profit Beats Estimates After Controlling Costs, BusinessWeek, May 2012 []
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