Analysts have been keeping a close eye on the first-quarter results coming out of the offshore oil and gas drilling industry during the last few weeks, with hopes that the results will shed some light on the industry's expected slowdown.
For example, many analysts had suspected that Transocean (NYSE: RIG ) would release worse-than-expected results, as they expected the company to suffer from the wider industry slowdown. However, the company's first-quarter results showed no sign of any weaknesses within the industry.
Transocean reported first-quarter revenue of $2.34 billion, up from $2.25 billion during the fourth quarter of 2013. Transocean's fleet utilization rate came in at 78% compared to 75% for the fourth quarter of 2013.
What was really impressive about Transocean's quarterly report, however, was the company's cost-cutting program, which helped push operational expenses down by 13% from the previous quarter. A drop in the company's effective tax rate, from 17.7% to 15.1%, also helped improve margins.
All in all, this set of results was impressive and shows that as the sector's largest player, Transocean is leading the industry in cost cuts and efficiency despite concerns over the sector's outlook.
Transocean's performance seems to be driven by one thing, shareholder returns. Indeed, the company has designed its cost cutting, fleet improvements, and organizational restructuring to drive profits higher and support its newly proposed $3 per share dividend payout.
There have been some worries that Transocean's new payout will be unsustainable. However, management has been working hard to ensure investors that the payout is here to stay, and these first-quarter results reinforce this case.
Transocean's management has stated that the company is looking to stabilize the balance sheet through the sale of non-core assets, mainly old floaters. Additionally, the company is planning to spin off or convert a portion of its business into an MLP-like vehicle, including some of the company's best and newest rigs -- similar to the strategy Seadrill is using.
Actually the company has already announced plans to spin off eight of its UK North Sea midwater drilling rigs. The company expects to establish the new entity, Caledonia Offshore Drilling Company, during the second half of 2014.
What's more, Transocean plans to boost margins in order to free up an additional $500 million by the end of 2015.
However, with 361 million shares in issue a dividend payout of $3 per share will likely cost Transocean slightly under $1.1 billion per annum. The company's cash flow from operations has averaged $2.6 billion during the past four years, which provides plenty of cover.
Industrywide cost cutting
Rowan Companies (NYSE: RDC ) also released first-quarter earnings recently, and the company beat the forecast by $0.07 per share. However, the company did report a 4% drop in revenue as two of its highest earning jack-up rigs in the North Sea remained out of service while undergoing essential maintenance.
Still, like Transocean Rowan's earnings growth came from cost cutting as the company's operating margin, excluding one-off items, ticked up to 25% from 23%.
However, while Transocean's management has a shareholder focus, Rowan's management is targeting growth. For example, the company has only recently reinstated a token $0.10 per share quarterly dividend payout, and the company plans to spend around $2 billion over the next few quarters to commission new drillships and refit old rigs. It remains to be seen which company has made the better choice; Rowan with its growth hunt, or Transocean returning cash to investors.
So all in all, Transocean posted solid first-quarter results, and the company is making real progress in cutting costs and improving margins. What's more, Transocean does not appear to be suffering from any kind of downturn in the offshore drilling market as of yet.
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