The Macondo well incident continues to haunt Transocean
Improved business, poor results
Revenue rose 9%, to $2.3 billion, from last year's first quarter. Revenue from its contract drilling services, which is a part of core operations, grew 13%. However, operating income fell 27% to $270 million, partly because of higher operating and maintenance expenses (which grew about 4%), but mainly because of the impairment charge. The fall in demand for shallow-water drilling rigs in the Gulf of Mexico prompted management to write down assets, which includes goodwill. As a result, net income dropped to $59 million, as compared with $340 million a year back.
This isn't too surprising. Shallow-water drilling in the Gulf looks especially bleak, with specialists in this segment, like Hercules Offshore
But if you are prudent enough to look beyond earnings ...
However, if all notional expenses and paper losses are added back to Transocean's net income, then cash flow from operations registered a healthy 38% growth to $540 million. What worked to Transocean's advantage were its 50 high-specification rigs, capable of drilling in ultra-deepwater, deepwater, and harsh environmental conditions.
Revenue from high-specification floaters (offshore rigs) jumped 23% to $1.6 billion and contributed to a whopping 72% of total contract drilling revenues -- up from 66% last year. This is one segment I'm betting big on for the future. Average dayrates for ultra-deepwater rigs grew 15% to $534,900. SeaDrill
Currently, backlog contracts are worth nearly $21 billion, with high spec floats accounting for $16 billion. Although these contracts can be reversed without carrying much of a fee, the demand, as well as dayrates, should only go up from here. Investors must keep an eye on this stock.
Foolish bottom line
Another factor that draws me to this stock is its dividend. A yield of 6.8% is hard to miss, especially when growth opportunities are present. I admit there have been problems for this company, the most prominent being the Gulf tragedy. However, they can't have an impact on its earnings potential forever. Aside from that, Transocean seems to be on the right path. Keep abreast of the situation by adding Transocean to your free personalized Watchlist.
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Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Transocean and SeaDrill. Motley Fool newsletter services have recommended buying shares of SeaDrill. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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