Transocean Ltd. (NYSE:RIG), the world’s largest offshore drilling company, released a strong set of Q3 2013 earnings on November 6. The results, which beat market expectations, were aided by stronger utilization rates, higher average day rates as well as a smooth functioning of the company’s fleet. Quarterly revenues increased by around 5% year-over-year to $2.56 billion while adjusted income from continuing operations before taxes rose by around 4% to $618 million.  Here are some of the key takeaways from the company’s earnings release.
Trefis has a $53 price estimate for Transocean, which is roughly 10% ahead of the current market price.
High Specification Floaters Continue To Propel Results: Offshore drilling activity has remained strong over the last several quarters supported by rising crude oil prices as well as increasing natural gas prices in most parts of the world. Transocean has largely been focusing on the high end of the offshore drilling market, with its fleet geared towards high-specification floaters such as ultra-deepwater, deepwater and harsh environment floaters since they typically have the highest dayrates. These high specification rigs contributed close to 76% of the company’s contract drilling revenues during Q3. During the quarter, utilization rates for the high-spec floaters rose to around 90% from around 85% last year while revenue efficiency also saw some improvement. Utilization rates are a ratio of the number of rigs working on contract to the total number of rigs, while revenue efficiency is a measure of how much revenue a rig actually earns while it is contracted versus the maximum that it could potentially earn. The average dayrate for Transocean’s fleet also increased by around 4% since last year to $392,400. Harsh environment floaters recorded the largest increase (around 11%) thanks to higher activity in the North Sea.
Gross Margins Improve Sequentially, But Lower Year-Over-Year: Transocean has not been as profitable compared to some of its competitors such as Seadrill (NYSE:SDRL) due to higher maintenance costs and its relatively older fleet. During the third quarter, gross margins stood at around 31% which is a marginal improvement over Q2. However, margins were lower compared to last year as operation and maintenance costs rose. We believe that achieving higher margins is likely to be a key catalyst for the company’s stock in the near term.
New High-Specification Jack-Up Rig Orders: Transocean’s fleet of high-specification jack-up rigs, which are primarily used in shallow waters, have been doing well with revenue efficiency and utilization levels remaining above 95% over much of this year. Transocean currently has a fleet of 12 jack-up rigs, 3 of which entered service this year.  Now, the company intends to add five new high specification jack-up rigs to its fleet at a cost of around $1.2 billion. The rigs are expected to be delivered progressively from the first quarter of 2016 till the third quarter of 2017. 
Trefis is updating its valuation model and price estimate for Transocean to account for the earnings release.Notes: