Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Transocean is Missing the Mark

By Bob Ciura - Mar 6, 2014 at 10:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Not only did Transocean under-perform its industry peers in 2013, but this year it may be even more difficult for Transocean to beat its competition.

Oil driller Transocean ( RIG -2.74% ) has a number of broad catalysts working in its favor. The global economic recovery remains steady, and demand for energy is rising, particularly in the emerging markets. That's why many oil drillers, such as Seadrill ( SDRL ), had very strong results in 2013.

And yet, Transocean completely whiffed in the fourth quarter, which weighed on its full-year results. Whereas Seadrill realized improvements in key metrics for oil drillers such as utilization and fleet efficiency, Transocean couldn't keep up. Investors should be at least slightly concerned that Transocean's problems are specific to itself, which may be a case of management ineffectiveness.

Transocean's year in review
Transocean's cash flow declined from $2.71 billion in 2012 to $1.92 billion last year. In percentage terms, that represents a nearly 30% decline. To be fair, $560 million of the decrease was due to a payment associated with its settlement with the Department of Justice stemming from the 2010 Macondo rig explosion.

Still, even excluding the settlement charge, Transocean's operating cash flow declined last year, due in large part to an extremely poor fourth quarter. Transocean realized worsening utilization and fleet efficiency in the final three months of the year. Utilization stood at 75%, down eight percentage points from the third quarter. In addition, fleet efficiency dropped on a quarter-over-quarter basis as well, to 91%. The reason for this is that Transocean was forced to endure prolonged downtime on certain ultra-deep water rigs.

Transocean's poor quarter was certainly a surprise, as oil drillers are seeing strong results for the time being. While there are broad concerns over the industry's near-term future, the fourth quarter was supposed to have been strong. Indeed, Seadrill reported 6.7% growth in operating cash flow in 2013. That's thanks to excellent utilization. Seadrill's floaters and jack-ups produced utilization rates of 94% and 98%, respectively, in the fourth quarter.

Moreover, Transocean's profits were weighed down by significantly higher expenses. Capital expenditures totaled $948 million, more than double the level from the third quarter. The sharply higher capital expenditure level was due primarily to expenses associated with Transocean's newbuild program.

This is an area that can be forgiven. Oil drillers across the board are experiencing higher expenditures, as the sector continues to grapple with aging fleets. Consider that fellow driller Diamond Offshore ( DO ) received a tepid reaction from analysts when it projected 2014 capital expenditures would double from 2013 levels. Diamond Offshore expects to allocate $2.1 billion to newbuilds and upgrades of its fleet, compared to $1 billion spent on these initiatives last year.

As a result, it's not surprising to see Transocean's capital expenditure levels increase along with its peers in the industry. However, the fact that Transocean isn't executing in its core operating activities is indeed cause for concern. Transocean's lagging metrics imply that it's losing ground to the competition.

Near-term risks for Transocean
Transocean, along with other oil drillers, is forecasting a period of softness over the upcoming months, as the pace of global drilling contracts slows down. In addition, Transocean has a unique uncertainty that still lingers from the 2010 Macondo disaster. Following the incident, Transocean was forced by the U.S. government to implement enhanced regulatory and safety measures. As a result, this has caused Transocean to experience above-average out of service time and additional maintenance costs that other drillers don't have to worry about.

Further, a broader slowdown in customer demand puts pressure on Transocean as well. Of its three key operating segments, only its high-specification jackups are expected to sustain utilization rates and contracting activity through 2014. Its two other segments, high-specification and mid-water floaters, are both expected to see diminished demand, which will have a negative effect on utilization and dayrates.

The takeaway from Transocean's 2013 report is that while the industry as a whole is forecasting a slow period up ahead, Transocean has a particular set of concerns investors should be aware of. It's still being weighed down by the 2010 rig explosion which may cause it even greater down times and lower utilization than its competitors this year.

Another company exposed to offshore activity scares OPEC

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$2.84 (-2.74%) $0.08
Diamond Offshore Drilling, Inc. Stock Quote
Diamond Offshore Drilling, Inc.
DO

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/04/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.