Transocean Estimate Revised to $58 on Weak Revenue Growth, Margins

Rig operator Transocean (NYSE:RIG) recently announced fourth quarter and full-year 2011 results, reporting a full-year loss with $5.2 billion of impairment charges and a dip in revenues compared to 2011. ^[1] The deepwater operator said that it would reduce dividends in order to bolster its financial position. In light of recent accidents involving deepwater facilities, rig operators like Transocean are facing tougher regulatory scrutiny, pushing up costs. Transocean also set aside a $1 billion in loss contingencies related to the Gulf of Mexico spill. The company provided the rig used by BP‘s (NYSE:BP) to drill the Macondo well. Taking these factors into account, we have revised our estimate for Transocean from $70 to $58, which is still about 10% ahead of its current market price.

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Low utilization

Transocean’s reported rig utilization fell to 57% for 2011 as rigs were faced with higher downtime because of maintenance work and other reasons. ^[1] However, utilization picked up in the fourth quarter to 61% from 58% in Q3. The higher utilization could be a result of a resurgence in deepwater activity in the U.S. Gulf of Mexico, where the government recently sold leases for new exploration activity. Transocean is focusing on deepwater and ultra-deepwater exploration to drive revenues growth in the future. We expect the upswing in utilization rates to continue over the next couple of years, buoyed by high crude prices and efforts from oil companies to replace declining reserves.

Liabilities set aside for potential BP charges

A bulk of the impairment charges reported by Transocean resulted from a downward revision of the market valuation of its contract drilling business. ^[1] The company also set aside $1 billion for possible losses related to its role in the U.S. Gulf of Mexico spill. Transocean has been involved in a lengthy legal battle with BP over its role in the disaster. BP will have to indemnify the rig operator from third party spills but federal authorities can still impose penalties on Transocean if it is deemed to be partly responsible for the pollution that resulted from the incident.

We have updated our models to incorporate Q4 results, primarily the utilization outlook, as well as include potential liabilities. The primary changes relate to margins, as our initial estimates were forecasting a pronounced recovery in margins which we now expect will be more gradual.

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1. Transocean Ltd Reports Fourth Quarter and Full Year 2011 Results, Transocean [↩] [↩] [↩]