Transocean’s Stock Surges As The Company Beats Earnings Estimates; But Contract Backlog Continues To Decline

Transocean (NYSE:RIG), the world’s largest offshore drilling service provider, took the market by surprise by posting strong operational performance in its September quarter earlier this week. Despite declining contract backlog and rig utilization during the quarter, the Switzerland-based company reported a jump in its earnings on a sequential basis driven by its cost reduction initaitives ^[1]. The company exceeded the consensus estimate for both revenue and earnings by a notable margin, reinforcing investor confidence in the company’s fundamentals. As a consequence, Transocean’s stock surged by more than 6% on 3rd November 2016, when the company held its third quarter conference call.

Source: Google Finance

Operational Highlights

Transocean’s contract backlog continued to drop even in this quarter, and stood at $12.2 billion at the end of October. Contract backlog is a key indicator for an oilfield contract’s future prospects and is a closely watched metric in the industry. A continued decline in this metric implies that the drilling company does not have a strong pipeline of contracts that can be converted into revenue in the coming quarters. While the persistent decline in Transocean’s backlog is a red flag for its investors, the offshore driller still holds the highest contract backlog in the industry, much higher than its peers. This should be a respite for the investors, since Transocean will be the first one to recover in the industry when the commodity prices rebound.

On the cost front, Transocean managed to bring down its operating costs significantly in this quarter. The oilfield service provider’s operating costs declined 13% in the third quarter compared to the previous quarter, causing a drastic improvement in its operating income and margin. The company’s operating income for the September quarter was $225 million, almost 46% higher than the June quarter of this year. Also, the company’s operating margin grew close to 25% in the quarter, from 16.3% in the last quarter. Overall, Transocean recorded a net profit of 25 cents in the quarter, as opposed to market estimate of 14 cents.

Transocean’s Current & Projected Fleet

Source: Transocean’s Presentation At Barclays Conference, September 2016

In terms of the financial metrics, Transocean’s position improved in this quarter. The company’s third quarter cash flows from operations stood at $440 million, more than 50% higher than the second quarter. Further, the offshore service provider’s debt obligations declined almost 3% since the beginning of the year. While the debt obligations continue to be a huge burden on the company’s balance sheet, the company’s newly issued debt of $1.25 billion will be used to prepay the debt obligations worth $1 billion due between 2020 and 2022. In addition, the company saw a notable increase in its shareholders’ equity and cash balance at the end of the September quarter, which has enhanced the company’s perception among investors.

Thus, we believe that although Transocean is in the middle of tough times, it is fighting tooth and nail to weather this downturn. There is a long way to go for the company to revert to its pre-downturn levels, but it is on the right track to achieve its goal.

Have more questions about Transocean (NYSE:RIG)? See the links below:

• Transocean’s Weak Dayrates And Utilization Weigh Heavily On Its 2Q’16 Earnings; Contract Backlog Continues To Drop
• Transocean To Witness A Notable Drop In Its 2Q’16 Due To Softness In Drilling Demand
• What Will Be Transocean’s Liquidity Position At The End Of 2016?
• How Will Different Rig Count And Average Daily Rates Combinations Impact Transocean’s Contract Drilling Revenue In 2016?
• Lower Impairments Augment Transocean’s 1Q’16 Earnings; Contract Backlog Continues To Decline
• Plummeting Commodity Prices Likely To Pull Down Transocean’s 1Q’16 Results
• How Is Transocean’s Contract Backlog Correlated To Crude Oil Prices?
• How Will Transocean’s Revenue Move If Crude Oil Prices Average At $50 Per Barrel In 2018?
• How Will Transocean’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• Transocean’s Earnings Suffer Due To Weak Drilling Demand; Diminishing Backlog Likely To Cause Further Damage

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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1. Transocean Announces Third Quarter 2016 Results, 3rd August 2016, www.deepwater.com [↩]