On Aug. 6, Transocean (NYSE:RIG) reported earnings that initially appeared very promising with soaring earnings, plummeting tax rates, and higher operating cash flows. However, further analysis shows that Transocean is still a long way off from where it needs to be to complete its turnaround.
For example, net earnings per share were $1.61, up 92% from last year's $0.84 per share and beating analyst expectations by 44%. Operating cash flows came in at $636 million, up $500 million from last quarter and 53% from last year while the effective 12-month tax rate fell from 23.5% to just 12.6%. Capital expenditures were flat at $351 million compared to a year ago but down $780 million compared to the first quarter.
On the negative side of the ledger the fleet utilization slipped from 80% to 78%, revenues were flat at $2.328 billion, and the backlog shrank to $25.078 billion compared to $27.3 billion a year ago, and $29.7 billion at the beginning of 2013.
Drilling into the numbers
The greatly reduced taxes were due to greater rig idling in high-tax jurisdictions as seen by utilization rate; the rate was suppressed due to Transocean's aging fleet, which is mostly composed of fourth generation rigs. This is compared to younger competitors such as Seadrill (NYSE:SDRL) and Pacific Drilling (NYSE:PACD), whose fleets consist of mostly sixth and seventh generation fleets.
...further deterioration in the offshore drilling market as relatively flat demand is met with a relentless surge of new supply. More problematic is the increasing likelihood that a huge chunk of the existing fleet will ultimately become impaired and/ or obsolete...Over 70% of RIG's midwater fleet will come off contract by the end of 2015 in what we expect will be a very soft market for older, midwater assets and thus project weak utilization.