Surprisingly Strong Results From Transocean Ltd

For the first quarter, Transocean Ltd (NYSE: RIG  ) generated earnings that smashed analyst estimates. The offshore driller, which has struggled since the Macondo accident and is plagued with old rigs, put together one of the best quarters in years.

For offshore drillers, two key metrics dictate the level of profits: revenue efficiency and fleet utilization. In the case of Transocean, revenue efficiency hit 95.7% to reach the highest level since 2008. Fleet utilization is still struggling at 78%, but the level is high enough to produce huge profits.

The numbers are comparable to those of other offshore drillers like Noble Corp (NYSE: NE  ) and Diamond Offshore Drilling (NYSE: ESV  ) that have smashed estimates, yet face an uncertain short-term outlook.

Strong earnings
Transocean reported a small sequential increase in revenue to reach $2.34 billion in part due to a $100 million increase in revenue from the higher efficiency rate. Earnings per share surged to $1.43 and handily exceeded analyst estimates of around $1. The surge in earnings was the combination of an increase in revenue and a large decline in operating costs. A large portion of the cost decline was due to roughly $110 million of reduced shipyard maintenance due to timing issues that the company won't benefit from long-term.

Similar results were seen at both Noble and Diamond Offshore that led both companies to easily surpass analyst estimates. Noble had lower than expected downtime of 4.5% during the quarter leading to a earnings beat of $0.34. Likewise, due to operating efficiencies Diamond Offshore saw earnings beat analyst estimates by $0.28.

Dayrate declines
With a relatively low fleet utilization rate of 78% for the first quarter, it isn't surprising to see Transocean accept new contracts with substantially lower dayrates. The May fleet update highlighted some of the recent contracts that were in the news. The Dhirubhai Deepwater KG1 signed a three-year contract offshore Brazil at a dayrate of $440,000, down from the prior rate of $510,000. Most concerning was the GSF Development Driller II accepting a contract of a three-well deal in the Black Sea offshore Romania for only $360,000 per day. The rig was previously working in the Gulf of Mexico for a whopping $606,000. A few other rigs were signed to contracts at or below previous dayrates.

These declining dayrates for the working rigs, combined with the low fleet utilization, are sending the earnings estimates down for 2015 to the tune of nearly 20% below the current 2014 estimates. Even more interesting is that despite the $0.41 earnings beat in the first quarter, analysts haven't increased current year estimates.

Noble Corp produced a fleet utilization of 84% in the first quarter, and analysts expect the company to continue generating revenue growth for 2014 and 2015. Diamond Offshore has a similarly bullish outlook with the expected delivery of several ultra-deepwater rigs in the next couple of years. The company even bought $86 million worth of stock during the first quarter to highlight the valuation proposition.

Bottom line
The current valuation equation is a tough situation with Transocean generating stronger operations along with reduced dayrates going forward. In addition, with the increased annual dividend of $3, the stock now yields a very strong 7.2% to compete against the largest in the industry. The stock, however, trades at an industry high of around 11.3x forward earnings. Both Noble Corp and Diamond Offshore Drilling provide cheaper alternatives to the constantly higher valuations of Transocean.


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  • Report this Comment On May 22, 2014, at 4:08 PM, spokanimal wrote:

    We knew dayrates were declining since they peaked last year and producers began balking at the high rates.

    The stock fell in recent months in anticipation of exactly what is happening right now, but it has stabilized in the low $40s in anticipation of what it next.

    What's next, is that dayrates are now lower, Oil prices have firmed to comfortably above $100 per barrel, and contract signings are beginning to pick up.

    If a stock price at any given time reflects what investors anticipate will be happening 8 months from now, then just how much value do YOU see in Transocean? Do you see as much value as Carl Icahn does?

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