For the second quarter in a row, Transocean (NYSE:RIG) was able to keep its results surprisingly steady even though the market for offshore rigs continues to remain weak. It's been able to do this because of the major changes under the surface that have allowed the company to reduce costs.
Let's take a look at the most recent results as well as some of the moves management is making to prepare Transocean for when demand for offshore rigs does increase, which, according to the company, may be happening sooner rather than later.
By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||$0.61||$0.62||$1.66|
The first thing that stands out in these results is the uptick in revenue. That additional revenue, however, isn't coming from where investors want it to. Part of that uptick comes from a $160 million early termination fee it received from Reliance Industries for halting work on its Deepwater India rig off the coast of India. Revenue from contract drilling operations was actually down to $793 million for the quarter.
The actual good news came from further reductions in costs. Total operations and maintenance expenses were down to $314 million. That's incredible when you consider that this time last year, operations and maintenance expenses were $794 million. Some of those gains are one-time items like gains from settling a litigation suit, but still those low costs are attributed to keeping costs very low when stacking rigs.
Most of what happened at Transocean this past quarter is business as usual. The company retired two more older rigs -- one deepwater floater and one midwater floater -- that had recently gone off contract. This brings the total of deepwater and midwater floaters -- the older, less capable rigs in Transocean's fleet -- to nine rigs compared to 25 this time two years ago. Of those nine rigs, four are still under contract. So don't be surprised if the company sheds even more of these older rigs as their contracts expire.
In December, the company did put one of its newbuild rigs, Deepwater Conqueror, into service with a five-year contract with Chevron. The company didn't recognize much revenue from this new contact in the prior quarter, but it should start to show up this quarter. On top of that revenue addition, the company was able to secure some smaller one-off contracts and short extensions, but these didn't add anything to the company's backlog. As of the most recent fleet status report, Transocean has $11.3 billion in contract work remaining in its backlog.
Perhaps most significantly, this quarter the company was able to complete the acquisition of its subsidiary partnership, Transocean Partners, after management upped its offer price from 1.1427 shares of Transocean for every share in the partnership to 1.2 shares of Transocean. This was an all-stock deal, so there wasn't any increase in debt leverage from this particular event.
The company did add considerable debt to the balance sheet, though, with the $1.2 billion in notes it used to finance the completion of two more newbuild rigs -- Deepwater Proteus and Deepwater Thalassa. Both of these rigs will be under contract with Royal Dutch Shell once they are completed, but they are not expected to come on line until Q4 2017 and Q1 2018, respectively.
What management had to say
CEO Jeremy Thigpen commented on the company results and offered some initial thoughts for the coming year. He said:
As a direct result of our strong performance in 2016, we generated cash flows from operations of $1.9 billion, which, when combined with the multiple financing transactions consummated throughout the year, further strengthened our liquidity. This enviable position, coupled with our industry-leading $11.3 billion backlog, allows us to prudently evaluate strategic opportunities, and continue to invest in our people and our business.
Looking forward, improving market fundamentals along with a steady flow of customer inquiries are increasing our confidence that the offshore drilling market trough is near.
What a Fool believes
It may not be noticeable right now, but Transocean is in a much, much better position than it was when this oil and gas downturn started to take hold. Sure, it has fewer rigs than it did, but that is a good thing because those rigs that are gone were old and didn't have much value in today's offshore rig environment. Today, the company has a much more modern fleet that is built to handle the complex work that will be required in the coming years to meet growing demand for fossil fuels.
We may still be a little ways off from a recovery for offshore rigs, but as Thigpen mentioned, there is growing interest in work as oil prices rise and producers start to spend money again. When that happens, Transocean looks like it is going to be well positioned to capture that market, and investors should overlook current weakness in its earnings results.