Transocean To Post Poor 1Q’17 Earnings Due To Weakness In Offshore Markets And Continued Pricing Pressure

-70.58%
Downside
6.25
Market
1.84
Trefis
RIG: Transocean logo
RIG
Transocean

Transocean (NYSE:RIG), the world’s largest offshore drilling service provider, surprised its investors for two consecutive quarters by exceeding market expectations, despite the volatility in the commodity markets. However, the Swiss company is likely to report losses for the first time in this downturn, despite the sharp rebound seen in the commodity prices. This fall in the company’s performance is largely driven by its declining contract backlog and continued pricing pressure in the industry. To top this, the company decided to sell off its 15 high-specification jack-ups to Borr Drilling in March 2017 for a sum of $1.35 billion. While the deal will allow the company to avoid the oversupply in the jack-up segment and attract better dayrates when the markets recover, becoming a pure floater will stifle the company’s contract backlog further, as the floaters  require large upfront investment which is current difficult to find in the market. Thus, we figure that Transocean is set to post a notable decline in its top line as well as bottom line for the March quarter, after the markets close on 3rd May 2017((Transocean To Announce March Quarter 2017 Results, 12th April 2017, www.deepwater.com)).

See Our Complete Analysis For Transocean Here

RIG-Q&A-1Q17

Relevant Articles
  1. How Will Transocean Weather The Lull In The Offshore Rig Market?
  2. How Are Transocean’s Key Metrics Expected To Trend?
  3. Key Takeaways From Transocean’s Q4 Results
  4. What To Watch As Transocean Reports Q4 Results
  5. What’s The Outlook Like For Transocean In 2019?
  6. What’s Transocean’s Outlook Like After Solid Q3?

Key Trends Witnessed In 1Q’17

As the commodity markets finally showed signs of recovery in the March quarter, the global rig count (oil and gas) rose sharply from 1,772 units at the beginning of the year to 1,985 units at the end of the first quarter. While most of this rebound was driven by the North American onshore markets, the international as well as offshore drilling markets continued to remain weak through the quarter. Since Transocean is one of the key player in the deepwater market, it continued to feel the pressure of sluggish demand in the industry. In fact, the company had mentioned on its earlier call that it foresees a tough environment in 2017, as the recovery in the deepwater and ultra-deepwater markets is expected to be slower than the onshore markets. This is clearly evident from the company’s latest fleet status report, which highlights that the company’s contract backlog has deteriorated further to $10.8 billion at the end of April 2017.RIG-Q&A-4Q16-3

Even though Transocean managed to win two contracts from Statoil for its harsh-environment semisubmersible, Transocean Spitsbergen, which is likely to contribute roughly $83 million to the company’s contract backlog, the overall contract backlog is significantly lower compared to the previous quarter. Thus, we figure that the company will see a drastic decline in its revenue as well as profits for the first quarter.

Further, in March, Transocean had announced its plans to sell 15 high-specification jack-ups to Borr Drilling for a sum of $1.35 billion. The transaction will include the remaining contract backlog for the jack-ups and the remaining yard installments for newbuild jack-ups. Of the 15 jack-ups, five jack-ups are currently stacked, and another five are newbuild jack-ups, with an expected delivery in 2020. Out of the remaining five, three jack-ups are expected to finish their contracts by the second quarter of 2017, while the other two have long term contracts that will end in March 2018 and October 2018.

As mentioned earlier, with the closure of this deal, Transocean will become a pure-play floater company. While floaters attract higher dayrates compared to the jack-ups, in the current low price environment floaters have been unable to attract contracts due to the large upfront investment required to operate them. Consequently, at present, oil and gas drillers across the globe are hiring only jack-ups to continue production from their existing wells and save on their costs. Although the dayrates of these jack-up contract are significantly lower than that of the floaters, these are helping oilfield services companies to avoid stacking of their rigs and somehow sustain their operations. Thus, we figure that apart from providing a sizeable amount of liquidity, the deal is unlikely to have any positive impact on Transocean’s profitability, at least in the short term.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research