Transocean’s Q4 Earnings Hold Up, But Outlook Is Challenging

Transocean (NYSE:RIG), the largest offshore driller, published its Q4 2014 results on February 25, reporting on a challenging quarter for the broader offshore drilling industry that saw the continued oversupply of ultra-deepwater rigs and tumbling crude oil prices. However, the company’s performance held up reasonably well as it worked through previously signed contracts. Contract drilling revenues fell by about 1.5% year-over-year to $2.17 billion due to weaker utilization of the company’s ultra-deepwater floaters, although adjusted net income rose by about 32% to $344 million owing partly to lower operating and maintenance costs. The company posted a GAAP net loss of $739 million, impacted by a one-time impairment charge of $1.21 billion, largely related to the decline in the market valuation of the contract drilling business. ^[1]  We believe that 2015 will prove a challenging year for Transocean, owing to its weak contracting position, tighter upstream capital budgets and the company’s older fleet. It’s also likely that we will see the full financial impact of the current market conditions in the company’s results over the coming quarters. Here is a brief look at some of the key metrics from the earnings release (related: What Does 2015 Have In Store For Transocean?).

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Trefis has a $25 price estimate for Transocean, which is significantly ahead of the current market price. We are currently revisiting our price estimate for the company.

Utilization Rates Trend Lower But Dayrates Improve

Transocean’s fleet-wide utilization levels dropped to 72% from around 75% a year ago, as some of the company’s ultra-deepwater floaters remained uncontracted during the quarter. Ultra-deepwater rig utilization rates stood at 69%, down from 87% a year ago. The ultra-deepwater markets are significantly oversupplied, and Transocean in particular has taken a beating owing to its older and less sophisticated fleet. Utilization rates – which are a percentage measure of the total number of operating days divided by the total number of available rig days during the period – are a crucial operating metric for offshore drilling companies, given their high operating leverage. We expect Transocean’s utilization levels to remain under pressure in the near term, given its poor contracting position. 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. ^[2] Interestingly, Transocean’s average dayrates improved from $393,100 in Q4 2013 to $413,500. This is possibly due to the fact that the company’s older and less sophisticated deepwater and ultra-deepwater rigs remained off contract, reducing the drag on the average dayrate.

Operating And Maintenance Costs Continue To 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 SeaDrill), the company has been taking steps to bring them down by downsizing its shore-based support infrastructure and eliminating some non-core functions. For Q4, O&M costs declined by around 10% year-over-year to $1.31 billion, owing to lower shipyard and maintenance costs. We believe that the current offshore downturn should give the company room to better manage its O&M costs on an absolute basis, as it scraps older and less efficient rigs and potentially makes some headcount adjustments. However, the number may continue to remain high as a percentage of revenues. Transocean has guided operating and maintenance expenses of between $4.5 billion to $4.7 billion for 2015, marking a 8% to 12% year-over-year decline.

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