Even though the market for offshore rigs continues to take swings at Transocean's (NYSE:RIG) financial statements, the company continues to keep the market from delivering a knockout punch by lowering its costs at a rate to keep earnings alive. This quarter was very much in line with this theme as some strong cost cutting measures actually boosted earnings despite further declines in revenue. Let's take a look at Transocean's most recent results and see how the company has been able to maintain profits throughout this downturn.
By the numbers
|Results*||Q3 2016||Q2 2016||Q3 2015|
Transocean's results for the quarter were good, but they aren't as good as what its earnings per share numbers suggest. Baked into that earnings per share number was a net one time gain of $0.37 related to an early extinguishment of debt and some tax benefits. After we pull out all of these gains, net earnings per share amounted to $0.25 per share.
The one change of note for investors was the company's rapid reduction in operating and maintenance costs. These expenses were down from $500 million in the second quarter to $404 million last quarter. Management says that the reduction in costs is mostly due to lower costs for stacked and retiring rigs as well as a reduction in total headcount.
Like last quarter, this was a pretty dull one from an operations standpoint. The company was able to pick up a few shorter term contracts that keep some of its rigs working, and last month the company announced that its Deepwater India has received a contract termination notice that will take $760 million out of the backlog -- this wasn't recorded in the company's results, though, as it happened after the third quarter. The company also announced that three of its older, midwater floating rigs will be retired. The deal to acquire the remaining outstanding shares in Transocean Partners (NYSE: RIGP) is still outstanding and awaits a special meeting where shareholders will vote on the deal on Nov. 11.
One thing worth highlighting this quarter was that the rigs that were under contract ran extremely well. Transocean recorded a fleet revenue efficiency of greater than 100%, this means that there was minimal downtime and many rigs received performance bonus incentives that helped the company exceed its own revenue projections for the quarter. Also that lack of downtime and minimal maintenance requirements is how the company was able to lower operations and maintenance expenses so much in the quarter.
Since it was a rather dull quarter, it seems like a great time to look at how much Transocean has changed since CEO Jeremy Thigpen took the helm in April of 2015. One of the things that has been his priority is to right size the company's fleet and keep the company's costs in check. Since that time, here is how the fleet has changed:
|Rig type (% of total fleet)||April 2015||October 2016|
|Ultra-deepwater floater||27 (35%)||29 (43%)|
|Harsh environment floater||7 (9%)||7 (10%)|
|Deepwater floater||7 (9%)||4 (6%)|
|Midwater floater||14 (18%)||7 (10%)|
|Harsh environment jack up||10 (13%)||10 (15%)|
|Under construction||12 (16%)||10 (15%)|
While the total fleet has declined by 10 rigs, what really matters here is the rigs it retired. All 10 of those rigs were older, less capable rigs from its deepwater and midwater fleet. One has to imagine, too, that these rigs will also be retired once they complete their contracts -- 2018 for all deepwaters, 1 midwater rig on contract beyond 2018 -- unless they can find some spot work. What's even more encouraging is that the 10 rigs under construction are 5 more ultra-deepwater floaters and 5 harsh environment jackups. When 2018 rolls around, the company's fleet will look radically different than what it looked like just 18 months ago.
The other thing that makes this encouraging is that the company has been able to achieve this fleet turnaround program while drastically improving its balance sheet. In those same 18 months, the company's total debt outstanding has declined 18% while cash on hand remains in excess of $2 billion. In a rather short time it appears that the company has gone from being one that looked to have a questionable future to one that is well positioned to survive this downturn.
What management had to say
CEO Jeremy Thigpen:
Due to our unwavering commitment to maximize uptime for our customers, and the outstanding performance of our crews and shore based personnel, we delivered revenue efficiency of 100 percent. Of note, we produced this exceptional result, while continuing to realize cost savings across the organization, which enabled us to improve our quarterly Adjusted Normalized EBITDA margin to 51 percent.
What a Fool believes
One thing that is especially promising about Transocean over several of its peers right now is that the company still has a decent backlog of work that will keep most of its current fleet under contract working through the end of 2017. Also, two of the rigs that are slated to go into service in 2017 are already under contract at rather favorable rates. Unless we see another large amount of early terminations, this suggests Transocean will have enough work to keep its financials afloat for a while longer.
If the company can continue to maintain solid operational levels like it did this past quarter, then it should be able to get through this tough time. If those rig retirements happen as one might expect, then in a couple years this company will be in great shape both from a fleet and financial perspective and may start attracting the eye of investors again.