Transocean Has A Good Q1 As Dayrates And Revenue Efficiencies Rise

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Transocean (NYSE:RIG), the largest offshore drilling contractor, posted a strong set of Q1 2014 earnings on May 7, beating market expectations on both earnings and revenues. The results were driven by stronger than expected day rates on the company’s ultra-deepwater floaters, better revenue efficiencies and lower operations and maintenance costs. Quarterly revenues grew by around 7% year-over-year to around $2.34 billion, while income from continuing operations rose by around 49% to $474 million. [1] Here is a brief look at the key trends behind the company’s earnings for the quarter.

We have a $45 price estimate for Transocean, which is slightly ahead of the current market price.

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Ultra-Deepwater Rigs Drive Growth, Securing New Contracts Will Be Important

Transocean’s fleet of ultra-deepwater rigs account for about half of the company’s revenues. Most of the operating metrics for the fleet remained strong through the quarter. For instance, average ultra-deepwater day rates rose to around $547,000 from around $457,800 a year ago, while revenue efficiencies stood at around 96.4%. However, reflecting the strong supply trends in the ultra-deepwater market, utilization rates declined by around 4% year-over-year to around 90%. Utilization rates are a ratio of the number of rigs working on contract to the total number of rigs in the fleet.

While the quarterly developments in terms of day rates do look impressive, a key factor that we will be watching for going forward is the company’s ability to sign on new contracts for the ultra-deepwater fleet.  The number of ultra-deepwater rigs globally 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] Transocean could face some challenges in contracting negotiations since its fleet is older compared to that of competitors.

Operating Margins Improve On Strong Revenue Efficiency and Lower O&M Costs

Transocean’s operating margins for the quarter improved to around 28.7%, from around 22% a year ago.  This improvement was likely influenced by better revenue efficiencies as well as lower operations and maintenance costs. Revenue efficiency is a percentage measure of how much a rig actually earns while it is contracted against the maximum revenues that it could potentially earn in that period. Fleet-wide revenue efficiencies (considering all rig types) improved to around 95.7% from 88% a year ago, due to a smoother operation of the fleet with less downtime.  Maintaining a high revenue efficiency is imperative for offshore drillers such as Transocean, since a rig will continue to incur significant fixed costs when it undergoes downtime without earning any revenues.

Additionally, the company was able to reduce its operation and maintenance costs by around 6.5% to $1.27 billion. Although Transocean’s O&M costs are still much higher than peers such as Seadrill, the improvements are notable. The company had previously indicated that it would be taking some steps to prune down costs by downsizing its shore-based support infrastructure, streamlining and consolidating some business functions and eliminating non-core functions.

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Notes:
  1. Transocean Q1 2014 Earnings Press Release []
  2. Howard Weil Energy Conference Presentation, Transocean, March 2014 []