Transocean’s Earnings Fall On Lower Ultra-Deepwater Rig Utilization

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Transocean (NYSE:RIG), the world’s largest offshore drilling contractor, released its Q4 2013 earnings on February 26. The results were weighed down by higher operating and maintenance expenses and lower utilization rates on the company’s lucrative ultra-deepwater rigs. Quarterly revenues remained flat year-over-year at around $2.33 billion, while adjusted net income fell by around 20% to $267 million. [1] In this note, we provide some key takeaways from Transocean’s earnings press release and what they could mean for the company going forward.

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Lower  Utilization An Indicator Of Some Softness In Ultra-Deepwater Market

Transocean has been focusing on the high-end of the offshore drilling market, and currently derives close to half its revenues from its high-specification ultra-deepwater rigs. However, the deepwater market has been facing a downturn of late, as supply seems to be creeping ahead of demand. There are around 38 ultra-deepwater rigs across the world that currently remain uncontracted, up from around 22 rigs a year ago. [2] Supply is expected to expand further, with about 20 new rigs being brought into the market this year. [3]

These trends have impacted Transocean’s results as utilization rates for ultra-deepwater floaters, a ratio of the number of rigs working on contract to the total number of rigs, fell to 87% from around 94% a year ago. Revenue efficiency, which is a measure of how much revenue a rig actually earns while it is contracted versus the maximum that it could potentially earn, fell by around 5% year-over-year to around 90%. Average day rates for these rigs were also lower by about 3% sequentially at around $510,200. Besides the oversupply situation in the market, Transocean’s utilization and pricing are also likely to have been impacted by its relatively older and possibly less sophisticated fleet. Transocean’s rigs have an average age of around 9.5 years, compared to Sea Drill and Ensco, whose rigs have an average age of less than 4 years. [4]

Higher Operating And Maintenance Costs Dent Margins

Transocean’s operating margins fell to around 17.4% for the quarter, down from around 23% a year ago, due to higher operations and maintenance expenses. This is somewhat of a concern, since some of the company’s peers such as Seadrill have posted operating margins of over 35% during the same quarter. [5] However, Transocean has been taking some steps to improve margins. Last year, it indicated that it would be scaling down its shore-based support infrastructure and would also be streamlining and consolidating some business functions. Transocean says that these initiatives should help raise operating income by about $800 million by the end FY2015.

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Notes:
  1. Transocean Q4 2013 Earnings Press Release, Transocean, February 2013 []
  2. Noble Leads Offshore Drillers Lower Amid Rig Slowdown, Bloomberg, January 2014 []
  3. Credit Suisse 2014 Energy Summit, Transocean, February 2014 []
  4. Does Noble Corporation’s Earnings Disappointment Really Point to a Fall for Offshore Drillers? , Motley Fool, January 2014 []
  5. Seadrill Q4 2013 Earnings Press Release, Seadrill []
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