Transocean’s 3Q Earnings Decline As Commodity Prices Continue To Plunge

Given the sluggish demand for drilling services driven by the persistently low commodity prices, Transocean (NYSE:RIG) reported a rough set of earnings for the third quarter on 4th November 2015 ^[1]. Though the company’s adjusted net profits fell both sequentially as well as annually, the magnitude of the decline was much lower compared to its peers. As expected, the world’s largest offshore drilling contractor saw a notable drop in its contract backlog, revenue efficiency, and rig utilizations in the latest quarter as large oil and gas companies continued to restrict their upstream capital spending. With a challenging outlook for commodity markets, and shrinking contract backlog, we expect Transocean’s margin to witness a larger contraction over the next couple of quarters. Here’s a quick look at the key highlights of the company’s 3Q earnings release and its guidance for the following quarters.

Source: Google Finance

Plummeting Contract Backlog Weighs Heavily On Revenues

As was evident from Transocean’s monthly fleet status reports, the company has not been able to attract any significant new contracts over the last three months, which has led to a sizeable dip in its contract backlog in the quarter. Further, the depressed commodity prices have also reduced the company’s bargaining power over its clients, leading to a drop in the dayrates for its projects. As a result, the Swiss company’s average daily revenue also declined over the third quarter. Besides, the offshore driller saw a fall in its revenue efficiency and rig utilization in the third quarter, despite stacking further rigs during the quarter. Due to these factors, Transocean recorded 3Q revenue of $1.61 billion, 29% lower on a year-on-year basis, or 15% on a sequential basis.

Source: Transocean Form 10-Q, 4th November 2015

On the cost front, Transocean held up its margins driven by its cost control initiatives during the quarter. The company managed to reduce its adjusted operating costs by almost 11% during the quarter, which enabled the company to maintain its margins even in the current environment. However, the company’s GAAP operating margins were significantly better in comparison with the same quarter last year because of a one-time impairment charge of close to $2.8 billion that was incurred last year. Thus, on an adjusted basis, the company lost almost $36 million, or $0.09 per share during this quarter, despite its cost reduction measures.

Source: Transocean Form 10-Q, 4th November 2015

Higher Capital Spending And Repayment Of Debt Result In Cash Flow Deficit

Unlike other energy services companies, Transocean’s capital expenditure during the September quarter more than doubled to $940 million, driven largely by the construction of newer rigs. Further, the Switzerland-based company also repaid long-term debt of more than $1.2 billion, which is expected to reduce its interest expense in the following quarters. While the repayment resulted in a decline in the company’s cash flows during the latest quarter, it is likely to be a positive for the company’s liquidity position going forward, since the company does not have any substantial debt obligations over the next two to three years.

Outlook Remains Challenging  

Transocean acknowledges that the outlook for commodity markets, and, in turn, for drilling demand, remains bleak. As a result, the company will continue to control its operating costs to weather this commodity down cycle. Thus, it has reduced its full year guidance for operating and maintenance costs to $3.7-$3.75 billion, and for G&A expense to $170- $180 million. However, the company increased its 2015 capital expenditures guidance to $2 billion, of which $1.7 billion will be attributable to its newbuild program, inclusive of capitalized interest. The full-year maintenance capital expenditures for 2015 is expected to be approximately $300 million. For 2016, the operating and maintenance costs are estimated to be lower by 25- 30% compared with adjusted 2015 costs. The capital expenditure for the next year is anticipated to be close to $1.4 billion, primarily due to the newbuild program.

Thus, we figure that Transocean may have a tough time to maintain its revenues as the drilling demand remains weak, while its cost reduction efforts may ease the pressure on its bottom line to some extent.

See Our Complete Analysis For Transocean Here

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1. Transocean Announces 3Q Results, 4th November 2015 [↩]