Transocean’s Earnings Surge Despite Weak Contract Backlog And Dayrates; Outlook For Offshore Market Improves

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Despite a consistent drop in its contract backlog and average dayrates, Transocean (NYSE:RIG), the world’s largest offshore drilling company, managed to surprise investors with its September quarter results last week. Driven by solid revenue efficiency, higher utilization, and lower costs, the company posted adjusted earnings of 16 cents as opposed to the consensus estimate of a loss of 8 cents. Going forward, the Swiss company is keen on completing its acquisition of Songa Offshore, which is expected to contribute to its contract backlog as well as high-grade its existing fleet. Further, the company anticipates some improvement in the offshore and deepwater drilling markets, which is likely to boost its value in the long term. We have a price estimate of $11 per share for Transocean, which is in line with its current market price.

See Our Complete Analysis For Transocean Here

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Below are the key takeaways from Transocean’s 3Q’17 earnings report using our interactive platform:

  • Although Transocean’s contract backlog and average dayrates continued to remain weak in the third quarter, the company posted a 7.6% growth in its revenue to $808 million, beating the market expectations by a huge margin, driven by the improvement in revenue efficiency, and rig utilization during the quarter. The offshore driller’s revenue growth coupled with its cost reduction efforts enabled it to report a sharp jump in its adjusted earnings.

  • Transocean is progressing well towards completing its acquisition of Songa Offshore. The deal will not only expand the company’s existing contract backlog by $4.1 billion (extended into 2024), but will also boost its existing fleet due to the addition of seven rigs. Plus, the $4 billion backlog does not include the possibility of follow-on multi-year options, which could add an incremental 12 years of work for four of these seven rigs. Further, the deal will enhance the company’s presence in the North Sea, one of the most desirable offshore markets, which can prove to be a huge upside for the company in the long term.

  • Apart from the addition of seven floaters from Songa Offshore, the company continued to high-grade its fleet by the delivery of its newly constructed rig – Deepwater Pontus. The new rig recently arrived in the Gulf of Mexico, and has commenced operations on a 10-year contract with Shell. The Deepwater Poseidon will also arrive in the region in the coming months, and will begin work on a similar contract early next year.
  • In addition to expanding its fleet, Transocean also announced its plans to recycle six additional floaters in order to enhance the overall quality and competitiveness of its existing fleet. While this will bring down the size of the company’s fleet, it is likely to be offset by the addition of newbuild rigs and floaters from Songa. However, post this restructuring, Transocean’s assets will be among the most efficient and capable rigs in the industry, which will make it easy for the company to attract new contracts as and when the markets rebound.

Outlook

As crude oil prices touch $60 per barrel, most of the oil and gas companies have managed to bring down their breakeven price to $50 per barrel or below. Consequently, the deepwater drilling industry has experienced six consecutive quarters of increasing floater contracting activity. Hence, Transocean, being the largest deepwater driller with a high-grade fleet, is likely to benefit from this recovery over time. The company anticipates an increase in activity in several parts of Africa, and in the Asia-Pacific region, particularly in India, Myanmar, Malaysia, and Australia, in the next 12-18 months. However, the company might continue to face some pricing pressure in these markets over the next few months, before it finally begins to recover to its historic levels.

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