Transocean’s 4Q’16 Earnings To Remain Weak As Contract Backlog And Dayrates Continue To Be Low

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Transocean (NYSE:RIG), the world’s largest offshore drilling service provider, had taken the investors by surprise in the third quarter of 2016 with an exceptional performance on the back of an anticipated recovery in commodity prices. However, as the Swiss-based company reports its December quarter results on 22nd February 2017((Transocean To Announce December Quarter 2016 Results, 3rd February 2017, www.deepwater.com)), the market anticipates a weak performance for the quarter, despite the rebound in oil prices over the last few months. This is primarily driven by the fact that there is a time lag between the bounce back in commodity prices and demand for drilling services. In addition to this, the offshore markets, that is the deepwater and ultra deepwater markets, have not shown any significant signs of revival in the last couple of quarters, despite an optimistic outlook for the oil and gas sector. Thus, the analysts expect the company’s top-line as well as profitability to continue to be low for the fourth quarter of 2016.

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Key Trends In 4Q’16

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With the announcement of the production cuts by the Organization of Petroleum Exporting Countries (OPEC) and some Non-OPEC members, the crude oil prices rose sharply in anticipation of an improvement in the demand-supply situation in the global markets. The WTI crude oil prices went up from an average of $44.85 per barrel in the September quarter to $49.21 per barrel in the December quarter. As a result, the market expected the drilling activities to increase steeply over the next few months. While the global rig count grew from 1,578 units at the end of the third quarter, to 1,778 units at the end of the fourth quarter, Transocean did not witness a notable jump in its contract backlog, and, in turn, its top-line.

That said, the company continues to hold the highest contract backlog in the industry. However, it is drastically lower than what is was two years earlier. According to the latest fleet status report, the offshore service provider has a contract backlog of $11.3 billion as of 9th February 2017, which is roughly 43% lower compared to the backlog in the first quarter of 2015.

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Besides this, Schlumberger and Halliburton, the top two oilfield services companies in the world, have emphasized in their latest earnings release that they do not anticipate an improvement in the offshore markets, and thus, expect them to underperform in the forthcoming quarters. This is evident from the fact that Transocean’s average dayrates have declined more than 20% over the last two years. As opposed to market expectations, the company has not been able to leverage the revival in commodity prices and its leading position in the industry to attract better prices for its services. Consequently, the dayrates for the newly acquired contracts by the Switzerland-based company are either too low or have not been disclosed, indicating an uncertain and weak future for the company.

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Lastly, to weather the commodity slump and sustain its operating margins, Transocean has been optimizing its rig fleet over the last few quarters. The company has either stacked or made a number of its rigs idle, with the aim to save on its operating costs. As of February 2017, the company has 27 stacked rigs and 4 idle rigs on its books. While this might save some costs for the company in the short term, the cost to make these rigs operational again will weigh on the company’s bottom-line. Thus, we foresee a difficult time ahead for Transocean in 2017.

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