Transocean Q3 Review: Lower Utilization Rates, $2.76 Billion Writedown Hurt Results

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Transocean (NYSE:RIG), the largest offshore driller, published its Q3 2014 earnings on November 9, reporting a relatively weak set of numbers that were indicative of the current glut in the ultra-deepwater rig market. Transocean’s quarterly revenues declined by 7.5% year-over-year to $2.27 billion owing to lower rig utilization rates, while adjusted net income fell by about 29% to $352 million. [1] On a GAAP basis, the company’s posted a $2.217 billion net loss, owing to a $2.76 billion write-down related to goodwill impairment and a weaker business outlook for its Deepwater rig asset group. In this note, we take a look at some of the key metrics that impacted earnings for the quarter.

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Trefis has a $33 price estimate for Transocean, which is over 10% ahead of the current market price. We are currently updating our model for Transocean to account for the earnings release.

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Lower Utilization Rates Hurt Revenues And Profitability

Transocean saw its fleet-wide utilization rates decline to about 75% this quarter, from around 83% last year and 78% during Q2, impacted by weaker usage of the company’s high-specification floaters. Rig utilization rates are a percentage measure of the total number of operating days divided by the total number of available rig days during the measurement period. The metric is one of the key drivers of profitability for offshore drillers, given their high levels of operating leverage.

The ultra-deepwater rig market is currently in a phase of oversupply, after years of heavy capital spending by drillers. The number of ultra-deepwater rigs globally is expected to grow to over 160 by the end of this year, while demand (including existing contracts, options and possible contracts) is expected to stand at just about 140 rigs. [2] The glut of rigs is making operators more selective about the rigs they deploy, and this is proving an issue for Transocean, since its rigs are older and less sophisticated, on average, compared to some competitors such as SeaDrill. According to Bloomberg Intelligence, the company has four ultra-deepwater drillships that are currently looking for work after oil companies either cancelled or delayed operations. Utilization rates on the company’s ultra-deepwater fleet fell by 7% year-over-year to 83%, while the deepwater fleet saw utilization rates fall by 24% to 59%. Things took a turn for the worse for the company’s harsh-environment floaters as well. While these rigs maintained close to full utilization through the last year, their utilization rates fell to around 65% during Q3. Statoil recently suspended the use of one of Transocean’s harsh environment rigs in the Norway North Sea, citing excess rig capacity.

Year-Over-Year Improvement In Dayrates Likely A Fleeting Factor

Although Transocean’s average day rates improved by around 4.6% on a year-over-year basis, they declined slightly on a sequential basis. The year-over-year improvement is likely due to contracts that were signed previously, when contracting activity remained strong in the market for high-specification floaters. We expect this to be a largely transitory factor, with rates declining going into 2015. Day rates negotiated on recent contracts haven’t been particularly encouraging. For instance, Transocean’s “Leader” harsh-environment rig was awarded a four year contract at an initial rate of $335,000 compared to a previous rate of $400,000. Earlier this year, the company’s Dhirubhai Deepwater KG1 drillship was awarded a three-year contract for work in Brazil in 2015 at a rate of around $440,000, which is about 14% lower than the previous contract rate.

Writedowns Could Be Indicative Of A Weaker Outlook

Transocean recorded a total of $2.76 billion in impairments this quarter amid the glut of rigs in the deepwater market and the weaker crude oil pricing environment. While about $1.97 billion of the impairment amount was attributable to a goodwill writedown on the back of a decline in market value of the company’s contract drilling business, a bulk of the remaining impairments were due to a weaker business outlook for the Deepwater Floater asset group. While these non-cash charges were not entirely unexpected, given the steadily building glut in the high-end of the offshore drilling market, they do indicate that Transocean could be bracing itself for weaker earnings over the near to medium term.

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