On Aug. 6, Transocean (RIG 2.24%) 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 (SDRL) and Pacific Drilling (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.