Transocean Posts Positive 1Q’17 Earnings; Outlook For Offshore Markets Remains Bleak

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Continuing its streak of exceeding market expectations, Transocean (NYSE:RIG) posted an earning surprise in the March quarter of 2017((Transocean Announces March Quarter 2017 Results, 3rd May 2017, www.deepwater.com)), despite the continued weakness in the offshore drilling demand during the quarter. The world’s largest offshore drilling service provider, that has not missed a single earnings estimate since 2013, reported an adjusted profit of 1 cent as opposed to the analyst forecast of an adjusted loss of 7 cents. That said, though the Swiss company managed to remain profitable for another quarter, its top line as well as bottom line dropped drastically, both annually and sequentially, due to the declining contract backlog and persistent pricing pressure in the industry. This deteriorating performance, coupled with the rising US oil production over the last couple of months, resulted in a large sell-off of the company’s stock, causing it to tank almost 4% in a single day.

Transocean foresees a tough 2017, as the offshore drilling markets are likely to remain subdued through the year due to the volatility in the commodity markets. We will be updating the company’s model shortly to reflect the latest results and guidance.

See Our Complete Analysis For Transocean Here

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Key Highlights of 1Q’17

Given the depressed drilling activity in the deepwater and ultra-deepwater markets, Transocean was unable to keep a majority of its rigs operational during the first quarter of 2017. As per the latest fleet status report, the company held 27 stacked rigs and 4 idle rigs during the first three months of the year. Further, with the expiration of the previous higher rate contracts, the company experienced a notable decline in its average daily rate and average rig utilization in the quarter. Consequently, the offshore contractor’s 1Q’17 revenue fell to $785 million, versus $1.3 billion earned in the same quarter of the previous year. Yet, the company managed to beat the consensus revenue estimate for the quarter by a fair margin.

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On the profitability front, Transocean continued to control its operating costs in order to sustain its declining margins. However, the company witnessed a sharp increase in its interest expense during the quarter, due to the large debt on its books. The higher interest costs were partially offset by the income tax benefit realized by the company, allowing it to record an adjusted net profit of 1 cent, and remain in the black for another quarter.

Besides, Transocean made little progress in improving its financial position by increasing its cash balance at the end of the year from $2.6 billion in 1Q’16 to $3.1 billion in the latest quarter. However, the company’s long term debt remained largely flat during the quarter. Also, the company aims to restrict capital expenditure to $500 million for the year, given the bleak outlook for the offshore markets.

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Going Forward

In order to utilize its idle rigs and improve its liquidity, Transocean sold its 15 high-specification jack-ups to Borr Drilling for a sum of $1.35 billion in March 2017. With this deal, the offshore provider aims to become a pure-play floater company. While the deal will provide short term liquidity to the company, it may not help the company in the longer term. This is because E&P companies globally are hiring only jack-ups to optimize production from their existing wells and save on their costs in the current low price environment. On the contrary, floaters have been unable to attract contracts due to the large upfront investment required to operate them. Although the company’s floaters might attract higher dayrates compared to the jack-ups in the future, Transocean has to forego contracts at present, which could hamper its deteriorating operations.

While Transocean won two new contracts from Statoil that will contribute roughly $83 million, the company’s contract backlog continues to be significantly lower compared to the peak levels of 2014. With a weak outlook for the deepwater and ultra-deepwater markets in the forthcoming quarters, we expect to see a further drop in the company’s contract backlog, and, in turn, top line. That said, the company’s performance will be critically linked with the recovery in the commodity markets as well as offshore drilling demand.

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