Yet again, Transocean's (NYSE:RIG) management has taken drastic steps to preserve its place as one of the top offshore rig companies in the business. This quarter, it decided to retire more rigs and take a huge writedown. At the same time, though, the company is about to close on a multibillion-dollar acquisition of new rigs. While it seems contradictory to do both at the same time, it actually makes sense.
Here's a brief look at Transocean's most recent results and what investors should make of these moves.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$808 million||$751 million||$906 million|
|Operating income||($1.14 billion)||($1.54 billion)||$229 million|
|Net income||($1.42 billion)||($1.69 billion)||$218 million|
There is a lot to unpack in these results because several events this quarter make these numbers look a bit off. Let's start with the big loss. Unlike last quarter, where the loss was attributed to the sale of its jackup fleet, almost all of this quarter's loss is attributed to the $1.39 billion asset impairment charge the company took to retire six of its rigs. Were it not for that impairment charge and another $90 million in charges related to discrete tax expenses, net income would have been closer to $0.16 per share.
One of the more encouraging results is the increase in revenue compared to the prior quarter, but that too is a bit misleading as the company received $87 million in revenue related to a terminated contract recovery from all the way back in 2015. Since that time, though, one of Transocean's rigs under construction started a 10-year contract with Shell, and three rigs received new contracts.
The more significant news this past quarter was that management did what it had hinted at doing for some time: make an acquisition. In August, the company announced that it agreed to acquire Norwegian rig company Songa Offshore for $1.2 billion. The deal also means Transocean will assume Songa's $2.2 billion in debt.
There are a couple of reasons these assets were so attractive. One is that they are newer rigs that are designed for harsh environments such as the North Sea and Arctic drilling. These kinds of rigs tend to generate much higher day rates since they are specifically designed for these special conditions.
Also, another reason these rigs looked attractive is that they all had long-term contracts in place. All four of Songa's harsh environment floaters have contracts with Statoil, some of which extend out to 2023. The total backlog of Songa's rigs is $4.1 billion. When combined with Transocean's backlog at the end of the quarter, the combined company has $13.5 billion in revenue backlog.
What management had to say
Here's CEO Jeremy Thigpen's comments on what the recent deal for Songa, the retirement of its older rigs, and those new contracts mean for the company over the next couple of years:
In addition to the strong operating results, during the quarter, we continued the high-grading of our fleet by announcing our intent to acquire Songa Offshore, which includes the addition of four new, high-specification, harsh environment semisubmersibles. We also announced our decision to recycle six additional floaters, further improving the overall quality and competitiveness of our fleet.
During October, we issued $750 million of senior unsecured debt with the intent of retiring our near-dated maturities. This action, coupled with cash flow from operations of $384 million, and the anticipated incremental backlog of approximately $4 billion attributable to the Songa Offshore transaction, further extends our liquidity runway, and positions us well for a market recovery.
What a Fool believes
As flashy as all of these moves look on paper, this is a continuation of business as usual for the past few years. All six of the scrapped rigs were more than 15 years old, and the acquisition of rigs should be a surprise to no one who has followed this industry lately. The offshore rig industry is ripe for consolidation as several players have already declared Chapter 11 bankruptcy.
As it stands today, Transocean remains one of the better bets in the offshore industry. It has a lot of contracted backlog to get through the next couple of years. It is winning enough contracts to stop the revenue hemorrhaging over the past couple of years, and it has lots of upside potential with several high-specification rigs ready to work. Add on top of that an absurdly cheap stock price, and Transocean is a stock worth revisiting.