Transocean Q4 Preview: Performance In U.S. Gulf Of Mexico Will Drive Results

by Trefis Team
+31.58%
Upside
25.75
Market
33.88
Trefis
RIG
Transocean Limited
Rate   |   votes   |   Share

Quick Take

  • Transocean is expected to release its Q4 earnings on March 4.
  • We expect revenues and profits to rise sequentially due to strong demand for deepwater drilling, particularly in the U.S. Gulf of Mexico.
  • Higher utilization rates and revenue efficiency could also help improve profitability.
  • Legal progress: Recently settled with the U.S. DoJ to resolve disputes relating to the Deepwater Horizon accident and also saw criminal charges against it in Brazil being dropped.

Transocean (NYSE:RIG), the world’s largest offshore drilling contractor is expected to release its fourth quarter earnings on March 4. During the third quarter, revenues grew by around 22% y-o-y to $2.4 billion, thanks to stronger demand for deepwater rigs. However, the company posted a net loss of $383 million due to certain non-cash charges relating to the sale of its shallow water rigs. [1] We expect the firm to post better results this quarter due to an uptick in demand for drilling in the U.S. Gulf Of Mexico and improving utilization of the firm’s fleet.

Legal Troubles Are Easing

In January, Transocean reached a $1.4 billion settlement with the U.S. Department of Justice (DoJ), to resolve civil and criminal disputes relating to the 2010 explosion of the Deepwater Horizon rig that the firm was operating for BP (NYSE:BP) in the U.S. Gulf Of Mexico. More recently, Brazilian courts dropped criminal charges against the firm relating to its involvement in an oil spill in the Frade oil field, off the coast of Brazil. [2] These developments should allow the firm to put much of its legal woes behind, and allow it to devote more attention and resources on the growing deepwater drilling market.

Business In The U.S. Gulf Of Mexico Following The DoJ Settlement

Although the average number of offshore rigs globally has been relatively flat over 2012, drilling activity in the U.S. Gulf Of Mexico has grown by nearly 20% over the same period. The region is Transocean’s most important geographic market, given that the firm has 14 deepwater and ultra-deepwater rigs under contract in the region. These rigs are among the most profitable for the firm given that they command dayrates of around $500,000 each. We believe that business in the region should help to bolster revenues and profitability for the quarter. The long term prospects in this region are also looking better as the U.S. Department of the Interior recently announced plans to auction over 38 million acres of federally owned waters, which would allow oil and gas companies to ramp up their offshore drilling activities in the region.

Rates Revisions And Utilization Improvements Could Help Boost Profitability

During the first three quarters of 2012, the industry witnessed a total of 46 ultra-deepwater contracts being executed, the highest number seen since 2008. [3] Higher demand for offshore drilling gives the firm better bargaining power with customers allowing it to realize better day rates on contracts. During the fourth quarter, Transocean reported new contracts at rates between 20% and 70% higher than than previous contracts.  ((Transocean Fleet Update Summary))

The strong demand should also help the firm to boost utilization rates, which are a measure of how many of the company’s rigs are working on contracts in comparison to total fleet size. These rates are an important metric given the high capital expenditure that the firm incurs in constructing these rigs, much of which is funded by debt. During Q3, the firm’s utilization rates rose to 77% compared to the average of around 63% in 2011. The firm’s revenue efficiency has also been growing steadily. In Q3 2012 revenue efficiency was nearly 95%, up from around 89% in Q3. If the firm improves on these metrics for this quarter as well, it could help to boost profitability.

Understand how a company’s products impact its stock price on Trefis

Notes:
  1. Transocean, Form 10-Q []
  2. Reuters []
  3. Transocean Q3 2012 Earnings Call Transcripts, Seeking Alpha []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!