What: Shares of RigNet (RNET) are getting pounded on Tuesday and were down more than 20% by midmorning. Fueling the sell-off was the company's third-quarter earnings report, which showed big declines in both revenue and earnings.
So what: RigNet reported revenue of $66.3 million for the quarter, which was down 24.5% year over year and 11.7% sequentially. Driving this decline was "reduced customer spending" after "offshore rigs were stacked and scrapped," according to CEO Mark Slaughter. This drove earnings down as well, with quarterly cash earnings, which is a non-GAAP measure, falling to $12.2 million or $0.69 per share. This is down 17.7% from the year-ago quarter, and 20.5% sequentially. Meanwhile, on a GAAP basis, the company lost $11 million or $0.62 per share after recording a $12.6 million impairment charge and $1.3 million in restructuring charges.
That loss aside, what the quarter really boils down to is the direct impact that rig stacking and scrapping is having on RigNet's financial results. According to offshore drilling leader Transocean (RIG -0.61%), since the downturn started last year floater drilling rig utilization has dropped, with marketed utilization down to 83%. Utilization would have been even lower if it weren't for the fact that 30 floating rigs have been cold-stacked, or idled, and another 43 have been scrapped, or retired, with half of those retirements coming from Transocean alone. Meanwhile, with the market only utilizing 74% of the jackup fleet, it has led to 99 jackup rigs being warm-stacked and another 61 units being cold-stacked, according to Transocean. This significant reduction in active drilling rigs is what's putting downward pressure on RigNet's revenue.
Now what: The cold-stacked rigs are unlikely to be put back into service until well after oil prices are meaningfully higher. In fact, there is a growing consensus within the industry that it could be three years before the bulk of the deepwater rigs are put back to work. This really mutes the near-term organic growth opportunities for RigNet, which is really weighing on the stock price.
