Transocean Q1 Preview: Ultra-Deepwater Fleet, Costs In Focus

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Transocean (NYSE:RIG), the largest offshore drilling contractor, is slated to release its Q1 2014 earnings on May 7 following the close of trading on the NYSE. We believe that the company’s results could be weighed down by lower utilization rates on its fleet of ultra-deepwater rigs, although this could be partially offset by better cost management.  During Q4 2013, the company’s 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 take a look at some of the factors that are likely to drive Transocean’s earnings for the quarter.

We have a $45 price estimate for Transocean, which is about 5% ahead of the current market price.We will be updating our price estimate for the company following the earnings release.

See Our Complete Analysis For Transocean Here

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Oversupply Of Ultra-Deepwater Rigs Could Put Pressure On Revenues: Transocean has a fleet of about 29 ultra-deepwater rigs, which together account for about half of the company’s total revenues. These rigs have been important to the company from a earnings standpoint, since they have the highest day rates and among the best utilization rates within the company’s fleet. However, the ultra-deepwater market has been facing significant headwinds of late, due to an oversupply of rigs in the market. The number of ultra-deepwater rigs is expected to grow from around 120 in early 2013 to over 160 by the end of 2014, while demand (including existing contracts, options as well as possible contracts) is expected to stand at around 140 rigs by the end of 2014. [2]

This could have an adverse effect on Transocean’s operating metrics, including day rates and utilization, which is a ratio of the number of rigs working on contract to the total number of rigs. During Q4 2013, the company reported day rates of around $500,000 for its ultra-deepwater rigs and we believe that this could come under pressure as the company negotiates new contracts. Ultra-deepwater utilization rates, which stood at around 87% during Q4 2013, could also see some contraction this year as Transocean’s older fleet could be less competitive in this oversupplied market. Transocean is estimating that the number of out of service days for its ultra-deepwater rigs will stand at around 597 in FY 2014 and around 838 in FY 2015 (related: Trends Driving Transocean’s Ultra-deepwater Business).

Watching For Progress On Cost Control Initiatives

Transocean has not been as profitable as some of its peers such as Seadrill (NYSE:SDRL) due to its relatively older fleet and higher operations and maintenance costs. As of 2013, Transocean’s operating and maintenance costs stood at around 60% of total revenues. In comparison, Seadrill’s rig operating costs were less than 40% of revenues. [3] However, the company has been taking some steps to prune down costs over the last several quarters, by downsizing its shore-based support infrastructure, streamlining and consolidating some business functions and eliminating non-core functions. We believe that cost management will be particularly important in the current market environment since there is a possibility that some rigs could be idled or stacked, which involves certain costs without bringing in any revenues.

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Notes:
  1. Transocean Ltd. Reports Fourth Quarter And Full Year 2013 Results, Transocean, February 2014 []
  2. Howard Weil Energy Conference Presentation, Transocean, March 2014 []
  3. Seadrill Form 20-F []