Transocean Q3: Revenues Will Be Driven By Ultra-Deepwater Fleet, But All Eyes Will Be On Costs

by Trefis Team
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Transocean Ltd. (NYSE:RIG), one of the world’s largest offshore drilling contractors, is expected to publish its Q3 2013 earnings after the markets close on November 6. The company has been doing reasonably well over the last few quarters, aided by strong demand for deepwater drilling as well as the smooth functioning of its fleet. During Q2, quarterly revenues grew by around 3% year-over-year to around $2.4 billion, while net income rose to about $307 million compared to a loss of around $304 last year, when the company took a $750 million charge related to the Macondo well incident. [1] Here is a quick overview of what to expect when the company releases earnings Wednesday.

Trefis has a $53 price estimate for Transocean, which is roughly 10% ahead of the current market price.

See our complete analysis for Transocean

Deepwater Demand Will Continue To Bolster Revenues

Crude oil prices have seen some stability over the last few years, with Brent crude prices largely ruling at above $100 per barrel. Natural gas prices have also been on the rise in most parts of the world except for North America, and this has enabled oil companies to justify the high cost and risk associated with deepwater and ultra deepwater plays. [2] Last year, around 28% of new offshore discoveries (in terms of volumes) came from deepwater plays while around 49% came from ultra-deepwater plays. [3] The outlook also looks strong as ultra-deepwater oil production is expected to expand from 1 million barrels per day currently to about 5 million barrels per day over the next few years. [4]

This has translated into strong demand and contracting activity for deepwater rigs. During the second quarter, Transocean’s fleet of ultra-deepwater rigs recorded a revenue efficiency of around 92% while utilization rates stood at around 96%. Utilization rates are a ratio of the number of rigs working on contract to the total number of rigs owned by the company, while revenue efficiency is a measure of how much revenue a rig actually earns on contract versus the maximum that it could potentially earn. Over the third quarter, Transocean reported an addition of around $2.7 billion in new contracts and currently has the largest revenue backlog in the industry, totaling about $27 billion. [5]

Watching For Cost Improvements

Transocean has not been as profitable as peers such as Seadrill (NYSE:SDRL) due to higher operations and maintenance costs as well as a relatively older fleet. The company’s gross margins during Q2 stood at around 30% (considering operation and maintenance costs as well as depreciation), a slight improvement over the first quarter. [6] We think that improving profitability will be a key catalyst for the company’s stock and this will remain a key factor to watch in the near term. Transocean has been downsizing its shore-based support infrastructure following the sale of its jack-up rig fleet last year, and has been streamlining and consolidating some business functions as well as eliminating some of its non-core operations. The company anticipates that these initiatives could help to achieve annualized savings of around $300 million beginning in FY 2014.

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Notes:
  1. Earnings Press Release, Transocean []
  2. Natural Gas Prices, BP []
  3. Transocean Presentation []
  4. Motley Fool []
  5. Transocean Fleet Status Report []
  6. Form 10-Q []
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