Declining Contract Backlog And Dayrates To Weigh On Transocean’s 2Q’17 Results

Given the continued softness in the offshore drilling demand during the second quarter, the market expects Transocean (NYSE:RIG), the world’s largest offshore drilling company, to post a weak set of financial results for its June quarter of 2017 after the market closes on 2nd August 2017((Transocean To Announce June Quarter 2017 Results, 17th July 2017, www.deepwater.com)). However, based on the pattern in the past few quarters, we expect the Swiss company to exceed the consensus expectations, and continue to surprise the market. That said, the offshore contractor’s contract backlog and average dayrates have been deteriorating over the last few quarters, and consequently, we expect this decline to continue to pull down its top-line for the quarter. In fact, the analysts estimate Transocean to report negative adjusted earnings for the first time since the beginning of the commodity downturn in the current quarter.

See Our Complete Analysis For Transocean Here

Key Trends Witnessed In 2Q’17

• According to the latest fleet status report, Transocean’s contract backlog stood at $10.2 billion at the end of the month of July. While this is significantly lower from $23.5 billion in contract backlog in the third quarter of 2014, the company has won some new contracts in the quarter, which require the reactivation of some of its idle and cold-stacked rigs. This comes as a good news for the company since it is considered difficult to find new contracts for such kinds of rigs.
• That said, the average dayrates at which these new contracts have been awarded is much lower compared to the rates that were offered earlier. Thus, even though the company has managed to find work for its idle rigs, it will have to restrict its costs and/or improve its operational efficiency in order to sustain its margins in the forthcoming quarters.

Source: Google Finance; US Energy Information Administration (EIA)

• The offshore driller recently divested all its high-specification jack-ups, including 10 of its existing jack-ups and five under construction to Borr Drilling for a sum of $1.35 billion((Transocean Sells Jackup Fleet To Borr Drilling, 31st May 2017, www.deepwater.com)), tacitly leaving the jack-ups markets altogether. As a result, Transocean is now a pure-play floater company, while it continues to hold its leading position in the ultra-deepwater and harsh environment markets. The deal has enhanced its liquidity position in the short term due to the receipt of upfront cash of $320 million. However, jackups are preferred over floaters by the E&P companies, particularly in a low price environment. Thus, we figure that the company may have to forego potential contracts in the short term, which could hamper its already declining contract backlogs, and revenues.
• With an aim to de-lever its balance sheet, Transocean announced its plans to purchase its long term debt of up to $1.5 billion, due in 2017, 2018, 2020, and 2021((Transocean Announces Cash Tender Offers, 13th June 2017)), utilizing the cash from the Borr Drilling deal and its existing cash balance of $3.1 billion. The move is a well-grounded one, as lower debt would result in interest cost savings for the company, which will boost its margins in the coming quarters. Further, even after the completion of the tender offer, Transocean will have around $1.9 billion of cash (excluding restricted cash), and a credit facility of $3 billion (unused) on its books, providing it enough flexibility to survive the prolonged downturn.

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