This was one of those quarters where Transocean's (NYSE:RIG) results aren't necessarily reflective of the company's accomplishments. Even though Transocean posted yet another quarterly loss, the company completed a major acquisition and netted some notable contract wins. These won't show up on the financial statements for a while, but they are indicative of a company poised to do better.
Let's look at Transocean's most recent earnings results and see why the company's future looks much brighter than what its earnings results say.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$748 million||$816 million||$629 million|
|EBITDA||$253 million||($60 million)||$187 million|
|Net income||($243 million)||($409 million)||($102 million)|
It's hard to get too excited about anything in Transocean's financial reports. Revenue ticked up compared with this time last year, but much of that was a result of the company's closing of its deal to acquire Ocean Rig UDW, which is now part of the consolidated results. The one thing that does stand out is that the company continues to post a respectable EBITDA margin despite much lower contract rates and a 62% fleet utilization rate.
The thing worth celebrating in these results is that Transocean continues to win contracts. The most notable contract this past quarter was a rig design and construction management contract coupled with a five-year drilling contract with Chevron. The deal is for one of Transocean's ultra-deepwater ships currently under construction that's expected to mobilize in the second half of 2021. This is a contract that won't show up on the financial statements for some time, but it represents an additional $830 million in contract backlog for Transocean. At the end of the quarter, Transocean had a total backlog of $12.2 billion.
What management had to say
One of the things many offshore rig companies have hung their hopes upon in recent years is the rapid decline in breakeven costs for offshore developments and underinvestment in the sector worldwide. With fewer and fewer major capital projects scheduled to go live over the next five years, there is an assumption that companies will start to ramp up spending soon to meet upcoming demands. On Transocean's conference call, CEO Jeremy Thigpen highlighted some of the changes in the offshore industry that should help to drive more contracts:
Breakeven economics for our customers' offshore projects are now consistently below $50 per barrel, with the most imminent project at or below $40 per barrel. Due to a lack of investment over the past four years, reserve replacement ratios continue to decline, and our customers have generated significant cash flows from operations, which they can use to service debt, return capital to shareholders, and, if they so choose, invest in longer-cycle projects, including long-delayed greenfield projects. [...]
Per a respected independent industry group, in 2019 as many as 90 offshore projects FIDs [final investment decisions] could materialize. This will represent a significant increase from the 51 FIDs that were sanctioned in 2018 and further supports our contention that the offshore market is in the early stages of a recovery. Across the global market and across our broad customer base, we continue to see multiple opportunities in the ultra-deepwater market.
You can read a full transcript of Transocean's conference call.
Getting ready for the upturn
For the past several years, Transocean and other offshore rig companies have been in capital-preservation mode. They've shed older rigs that probably wouldn't get new work and were just a drag on operational costs, while they preserved any operating cash flow they generated to manage debt and financing obligations. Now, most companies are shifting strategy toward preparing their fleets for new work. For Transocean, that means acquiring rigs from financially distressed competitors and upgrading some of its fleet with new technology. Concurrent with this most recent earnings report, the company said it's upgrading six of its rigs with automated drilling control systems, at the behest of its client, Equinor.
We're still playing the waiting game to see significant new contract awards and a return to profitability, but moves like this and the announcement of the Chevron deal are a sign that better days should come sooner rather than later. For a stock that's still trading at a fraction of its book value, those with the patience to wait for a full-blown recovery should take a look at Transocean.