Transocean’s Weak Dayrates And Utilization Weigh Heavily On Its 2Q’16 Earnings; Contract Backlog Continues To Drop

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The world’s largest offshore drilling service provider, Transocean (NYSE:RIG), reported a weak set of numbers for the June quarter 2016, owing to the continued weakness in the commodities market. While the company managed to beat the consensus expectations on revenue as well as earnings by a fair margin, depressed average dayrates and weak utilizations resulted in a sharp decline in its top and bottom line. [1]

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However, the major disappointment came due to the persistent drop in the Swiss company’s contract backlog, which stood at $13.7 billion at the end of the July 2016, more than 25% lower compared to the same time last year. Contract backlog is a key indicator of an oilfield provider’s future prospects and is a closely watched metric in the industry. A continued decline in this metric implies that the company’s revenue in the coming quarters is likely to fall further due to the softness in commodity prices.

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Besides, Transocean has stacked 28 of its existing rigs, based on its latest fleet status report, as opposed 21 rigs in the previous quarter. Given the slide in its contract backlog, we expect the company’s utilization and dayrates to remain low even over the next couple of quarters, which is likely to severely impact its top line for the rest of the year.

Finally, on the financial side too, Transocean’s position appeared weak. On the one hand, the company’s second quarter cash flows from operations declined to $838 million from $1.8 billion in the same quarter last year. On the other hand, the offshore service provider continues to have a large amount of long-term debt obligations on its books. While the company managed to reduce its debt marginally during the second quarter, it has issued $1.25 billion of fresh debt at a rate of 9%, maturing in 2023 to prepay the debt obligations worth $1 billion due between 2020 and 2022. Although this will postpone its debt obligations for a few more years, the large amount of debt will have to paid off eventually, which is likely to haunt the investor’s for a long time.

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Thus, we expect Transocean’s revenue as well as earnings to be low through 2016, given that even if the commodity markets recover, it takes 2-3 quarters for the oilfield services industry to experience a rebound.

See Our Complete Analysis For Transocean Here

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Transocean

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Notes:
  1. Transocean Announces Second Quarter 2016 Results, 3rd August 2016, www.deepwater.com []