Transocean Beats Estimates, But Weak Contract Coverage Will Hurt Future Results

Transocean (NYSE:RIG), the largest offshore driller, published its Q1 2015 earnings on May 6,  reporting on a quarter that saw the company scrap and idle several rigs amid weak demand and chronic oversupply in the global ultra-deepwater (UDW) drilling markets. However, despite the turmoil in the industry, the company’s quarterly financials held up reasonably well as it worked through previously signed contracts with revenues falling by just about 13% year-over-year to $2.043 billion, while adjusted net income fell by about 23.5% year-over-year to about $398 million. On a GAAP basis, the company swung to a net loss of $483 million, owing to impairments and other onetime charges. ^[1] We believe that the rest of 2015 and possibly 2016 will prove more challenging for Transocean, as the full impact of the current market conditions factor into earnings as higher-priced contracts end and as a greater number of rigs remain idle or work at lower rates. Here is a brief look at some of the key metrics from the earnings release and what to expect from the company going forward.

See Our Complete Analysis For Transocean Here

Trefis has a $20 price estimate for Transocean, which is slightly ahead of the current market price. We will be revisiting our price estimate for the company to account for the earnings release.

Dayrates Trend Lower, But Utilization Improves On Fleet Right-sizing

The contracting environment for offshore drilling rigs remains extremely challenging, with customers pushing for lower day rates in an increasingly oversupplied market. For instance, day rates on new ultra-deepwater contracts are down by more than 20% from their pre-cycle levels. However, Transocean saw its fleet wide day rates fall by just about 3.5% year-over-year to $398,300, as the company worked through older and higher value contracts that were signed before the downturn. The company’s move to scrap older (and lower dayrate) rigs is also likely to have benefited the metric. The company’s ultra-deepwater rates fell by about 2% compared to last year while rates for deepwater rigs fell by about 13%. However, we believe that the current market realities could hit revenues sharply going forward considering the company’s weak contract coverage, which means that it will have to negotiate contracts at lower rates or idle rigs as its existing contracts expire. As of Mid-April 2015, about 36%, 56% and 69% of Transocean’s high-specification floaters remained uncommitted for 2015, 2016 and 2017, respectively.

Transocean’s fleet-wide utilization rates stood at 79%, up from 78% last year and 73% during Q4, aided by the company’s aggressive right-sizing initiatives. Transocean has outlined plans to scrap 19 older and lower specification floaters that are likely to be economically and commercially non-viable in the current environment.  While utilization rates for ultra-deepwater rigs fell from 90% in Q1 2014 to about 68%, utilization of deepwater rigs and mid-water floaters rose by over 20% each. Rig utilization is defined as the total number of rig operating days divided by the total number of available rig calendar days in a measurement period.

Operating And Maintenance Costs Fall, Guidance Reduced Further

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, the company has been making considerable progress in pruning costs over the last year. For this quarter, O&M expenses declined by about 15% year-over-year to $1.08 billion as the company scrapped older rigs while also stacking rigs that remain uncompetitive in the current environment. O&M expenses expressed as a percentage of revenues also declined by about 1% year-over-year to about 53% likely due to improving revenue efficiency, lower downtime on rigs and also due to the firm’s onshore and offshore cost reduction initiatives. The company also further reduced its O&M guidance for the year to between $3.8 billion and $4.1 billion, which represents a 20% to 25% year-over-year decline. ^[2] While some of the reductions are likely to come from scrapping non-core assets and a reduction in expenses for stacked floaters, a part of the reduction is also likely to come from the stacking or scrapping of rigs that are currently in the company’s fleet, which could proportionately impact revenues.

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1. Transocean Q1 2015 Earnings Press Release [↩]
2. Transocean (RIG) Jeremy D. Thigpen on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 2015 [↩]