Transocean's (NYSE:RIG) $1.69 billion loss this past quarter was certainly eye-catching. Sure, the market for offshore rigs isn't great, but it isn't that bad. As has been the case in so many prior quarters, this number is nowhere near the complete picture, as almost all of that loss relates to a one-time event.
Let's go digging around in Transocean's most recent earnings report to figure out what happened, find out whether it should concern investors, and see what is in store.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$751 million||$785 million||$940 million|
|Operating income||($1.54 billion)||$173 million||$163 million|
|Net income||($1.69 billion)||$91 million||$82 million|
|Earnings per share||($4.32)||$0.23||$0.22|
Let's first address the elephant in the room. In the second quarter, Transocean closed a previously disclosed sale of its jackup fleet to Borr Drilling for $1.35 billion. As part of the announcement, CFO Mark Mey announced that the company would take a $1.6 billion impairment related to the carrying value of the fleet versus the sales price.
This impairment and two others -- a $113 million writedown for the value of two scrapped midwater floaters and a $48 million early debt extinguishment charge -- totaled $1.7 billion for the quarter and were responsible for the huge drop in earnings for the quarter. If we were to strip out these noncash charges, then Transocean's net income for the quarter would have been $1 million.
Management used the cash proceeds from the jackup sale and cash on the balance sheet to repurchase $1.34 billion in debt. At the end of the quarter, the company had $6.5 billion in long-term debt outstanding and $2.5 billion in cash.
There hasn't been much change from the prior quarter on the contract front. The company signed several single-well or multi-well contract extensions for some rigs currently in service, and it even was able to get some short-term work for three previously idle rigs. However, it didn't land any long-term work. If the rest of the industry wasn't getting long-term deals, it wouldn't be a big concern, but that isn't the case. Diamond Offshore (OTC:DO) was able to sign several multiyear contracts in the past quarter that led to an increase in revenue -- something we haven't seen at an offshore rig company in a long time. On a positive note, Transocean maintained a high operational efficiency of 97.4%, which means it is not experiencing much downtime.
What management had to say
Here's CEO Jeremy Thigpen's comment on the company's most recent performance:
We continue to safely and efficiently convert our industry leading $10.2 billion backlog into cash. Across our global fleet, we have now operated for 15 consecutive months without a single lost time incident. Our revenue efficiency, which is a close proxy for rig uptime, once again exceeded 97%. And, despite a sequential decline in revenue, our Adjusted Normalized EBITDA [earnings before interest, taxes, depreciation, and amortization] improved to 49%. In addition to this excellent and consistent operating performance, during the quarter, we continued to further strengthen our balance sheet, including the private offering of $410 million in senior secured notes, the divestiture of the jackup fleet for a total consideration of $1.35 billion, and a successful cash tender offer resulting in the repurchase of approximately $1.2 billion in existing notes with maturities between 2017 and 2021.
What a Fool believes
Transocean has been making noise over the past few months about making an acquisition or two. Why we haven't seen that happen yet is anyone's guess. Other companies have made deals lately. Putting my conspiracy theory hat on for a minute, I would say the delay may have to do with another major offshore company that has said it is likely going to file for Chapter 11 bankruptcy in a few months. Transocean probably isn't interested in acquiring an entire company, but there will likely be a lot of individual rigs selling for distressed prices.
If that is indeed the case, then the moves it has made recently make a lot of sense. It has cleared the deck of almost all of its debt that is due in the next four years and still has a large cash pile to facilitate a deal. This should give the company lots of financial firepower when the right assets become available.
Overall, Transocean's large net income loss this past quarter was a bit of a false alarm. Little has changed since the last time it reported earnings. Until we see the company pounce on a deal, we probably won't see a big change at Transocean or in the offshore rig market in general.