Surprisingly Strong Results From Transocean Ltd

Transocean, along with other industry stalwarts like Diamond Offshore and Noble Corp, continues to produce strong earnings and offer cheap valuations despite the industry downturn.

May 22, 2014 at 9:09AM

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.

Mark Holder has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information