Turmoil In The Offshore Markets Will Impact Transocean’s Q4 Earnings

Transocean (NYSE:RIG), the world’s largest offshore driller, is scheduled to publish its Q4 2014 earnings on February 25, reporting on a challenging quarter for the broader offshore industry that saw the continued oversupply of deepwater rigs and tumbling crude oil prices. We expect the company’s adjusted earnings to decline on a year-over-year basis owing to weaker utilization rates and average day rates. However, it’s unlikely that we will see the full impact of the turmoil in the offshore markets, given the contract-driven nature of the industry and the fact that most oil companies are likely to have executed against the remainder of their 2014 budgets as planned. On a GAAP basis, earnings will be impacted a non-cash charge of $100 million to $140 million, net of taxes, related to the scrapping of some of the company’s rigs. Overall, we expect 2015 to be a challenging year for the company, owing to its weak contracting position, tighter upstream capital budgets and the company’s older fleet. Here’s a brief look at what to expect when Transocean reports earnings (related: How Transocean’s Key Metrics Are Being Impacted By The Offshore Downturn).

See Our Complete Analysis For Transocean Here

Trefis has a $25 price estimate for Transocean, which is significantly ahead of the current market price. We will be revisiting our price estimate following the earnings release.

Dayrates And Utilizations Will Fall

During Q3 2014 , Transocean saw its fleet-wide utilization rates decline to about 75% from around 83% a year ago and 78% during Q2, impacted by weaker usage of its high-specification floaters. We expect the number to deteriorate once again in Q4 as more rigs are expected to have come off contract. 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. Although average dayrates remained almost flat sequentially during Q3 at around $410,000, the company could see a decline during Q4 as it works through lower priced contracts. We believe that both these metrics are set to deteriorate further going into 2015. In the current environment, customers have significantly better leverage in negotiating new contracts and extensions given that there are less rig rental dollars in an increasingly supplied offshore rig market. Additionally, the company’s fleet remains poorly contracted, further reducing its bargaining power. As of December 2014, 46% of the company’s fleet remained uncontracted for 2015 with 73% and 81% of rigs uncontracted for 2016 and 2017. This is significantly worse than the market average of 35%, 45% and 57% respectively, for the 3 years. ^[1]

Operating And Maintenance Costs Should Decline

Operating and maintenance costs are the single largest cost driver for Transocean. While Transocean’s O&M costs are on the higher side compared to the industry average, standing at more than 55% of total revenues (compared to under 40% for competitor SeaDrill), the company has been taking steps to bring them down by downsizing its shore-based support infrastructure and eliminating some non-core functions. Over the first nine-months of the year, Transocean reduced its operating and maintenance expenses by roughly  7.5% year-over-year and we expect this trend to continue, partially offsetting the impact of weaker dayrates and utilization levels. ^[2] Costs should improve both in absolute terms as well as in terms of percentage of revenues, as the company has been aggressively right-sizing its fleet, recently outlining plans to scrap a total of 12 low-specification midwater and deepwater floaters.

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More Trefis Research

1. Deepwater drilling markets – Darkness before dawn, OE Digital, February 2014 [↩]
2. Transocean Earnings Press Release [↩]