What’s Transocean’s Outlook Like After Solid Q3?

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Transocean (NYSE:RIG), the largest offshore driller, published its Q3 2018 results on Tuesday, beating market expectations on revenues and earnings, driven partly by higher utilization rates on its ultra-deepwater rigs. While the company posted a positive adjusted EPS of $0.06, its net loss on a GAAP basis came in at about $0.88 per share, on account of an impairment charge relating to two rigs that it retired over the last quarter. In this note, we provide an overview of the results and what lies ahead for Transocean.

We have also created an interactive dashboard analysis on Transocean’s expected 2018 resultswhich you can use to arrive at your own revenue and EPS estimates for Transocean.

How Did The Company’s Key Metrics Trend?

Over the quarter, Transocean’s drilling revenues rose by 17% year-over-year to $816 million, driven by its recent acquisition of Songa Offshore. While ultra-deepwater day rates remained depressed, falling to about $341k from $449k in the year-ago period, fleetwide utilization rates improved to levels of about 65% in Q3 2018, up from 52% in the same period last year due to the company’s recent fleet rationalization initiatives. Revenue efficiency, which is a measure of how much revenue a rig actually earns while it is contracted versus the maximum that it could potentially earn, stood at 95.2%. While this is relatively impressive, it marks a slight decline on a year-over-year basis.

Transocean Is Making Moves To Upgrade Its Fleet

While the ultra-deepwater market, which Transocean specializes in, remains somewhat challenging, the company has indicated that it was on the verge of a recovery, noting that day rates for ultra-deepwater drillships was likely to increase through 2019 and 2020. Contracting activity has also been picking up, with the company securing about $500 million worth of new contracts over the last three months, bringing its 12-month backlog to over $1.5 billion. Transocean has been focusing on upgrading its fleet, by scrapping older, less sophisticated rigs while taking advantage of the depressed market to acquire newer rigs. The company recently announced an agreement to acquire Ocean Rig in a cash-and-stock deal valued at about $2.7 billion. Ocean Rig has a fleet of 11 high-spec ultra-deepwater drillships (two of which are currently under construction) and two harsh environment semi-submersibles, which are currently much sought-after. Ocean Rig’s modern fleet and its presence in important offshore markets including Brazil, West Africa, and Norway could allow Transocean to better take advantage of an upturn in the market.

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