Transocean (NYSE:RIG), one of the world’s largest offshore drilling contractors, is expected to release its third quarter earnings on Monday, November 5. In the second quarter, the company reported a net loss despite strong sequential revenue and operating profit growth of 10% and 20%, respectively, due to certain non-recurring charges. For Q3, we expect the company to report a marginal decrease in revenues while earnings could also be hit due to non-cash charges relating to the sale of rigs.
Here are some of the factors we believe will influence the company’s results for the quarter.
Transocean has been realigning its asset strategy to cater to the growing market for deepwater drilling given that it offers higher day rates and profit margins. During the quarter, the company took solid steps executing on the strategy as it announced the sale of 38 shallow water rigs to Shelf Drilling Holdings Limited for $1.08 billion last month.
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Although the strategy is likely to have a positive long-term impact, the sale of the rigs is likely to result lower revenues and net profit margins for the quarter. Analysts have estimated that the selling price of the rigs was below the fair market value, and the company is expected to take a non-cash charge in Q3.
During the quarter, the company also reached a landmark $7.6 billion deal with Royal Dutch Shell to provide 4 new-build ultra-deepwater drill ships. The first drill ship is expected to be delivered in 2015. Ultra-deepwater rigs such as drillships and semi-submersibles can fetch day rates nearing $600,000 compared to shallow water rigs such as jackups that earn average rates of under $200,000 per day.
Focus on Efficiency
Transocean has steadily improved the revenue efficiency of its fleet to about 92.5% last quarter, up from 90% in Q1. Revenue efficiency is the actual revenue earned in a period divided by the highest potential revenue that could have been earned. Being in a capital intensive business, maintaining high utilization levels and revenue efficiency are critical to the company’s success. Another factor that we will be watching is Transocean’s control of its cost base through favorable contract terms and improved maintenance .
New Contracts and Rate Revisions
Renewed drilling activity in the Gulf of Mexico and contracts in growing offshore markets like Africa and Brazil should bode well for the company’s earnings this quarter. Last quarter the company was awarded contracts for offshore rigs in Nigeria, Egypt and Gabon, with day rates higher by as much as 20% than previous rates. We believe these new contracts will be accretive to the company’s earnings for Q3.
We will revisit our $57 price estimate for Transocean following the earnings release.