RigNet Inc. Earnings Decline After More Offshore Rigs Get Stacked

The oil market downturn is having a deep impact on the entire oil industry, with the offshore industry in particular having taken it on the chin. Due to a combination of weak oil prices and an oversupply of offshore rigs, the industry has been forced to cut back on the number of rigs in service, which is having a noticeable impact on RigNet's (RNET) results despite its best efforts.

RigNet results: The raw numbers

Data source: RigNet.

What happened with RigNet this quarter? 
RigNet was affected by the stacking and scrapping of offshore drilling rigs:

• Revenue was down not only over last year's third quarter, but it was also down 11.7% sequentially. Both of the company's segments were weaker with telecoms systems integration revenue declining primarily due to reduced activity and a smaller backlog while managed services revenue fell due to decreased spending by oil and gas companies on drilling projects.
• Quarterly cash earnings fell alongside revenue. However, earnings benefited from cost reduction efforts, helping to mute some of the impact from lower revenue.
• The company also recorded an impairment charge of $12.6 million and $1.3 million in restructuring charges. These charges pushed GAAP earnings into the red, with the company reporting a net loss of $10.9 million or $0.62 per share.
• Subsequent to the quarter's end, RigNet announced the acquisition of TECNOR, which is a Mexican remote communications provider for that country's oil and gas industry.

What management had to say 
CEO Mark Slaughter, commenting on the company's results, said:

The RigNet team executed well in the quarter, including winning new sites and new customers, but reduced customer spending affected our existing business as offshore rigs were stacked and scrapped. We further adjusted our cost structure in the quarter to align with market activity levels while maintaining customer service levels and long-term investments important for when market conditions improve. Our efforts continue to strengthen our capabilities, defend and expand our market presence and overall emerge as a better company. Moreover, with our strong financial position, we are well-positioned to execute against our long-term growth plans, both organically and inorganically, under the current market conditions.

Offshore drillers have stacked and scrapped a growing number of rigs due to the lack of work in the offshore industry amid weak oil prices. Transocean (RIG -2.10%) was among a number of drillers to announce another round of rigs being stacked or scraped this quarter. In this round Transocean idled two semi-submersible drilling rigs, one harsh-environment drilling rig, and two midwater floaters while scrapping one more rig. Overall, Transocean noted on its conference call that 30 floating rigs have been cold stacked while another 43 have been scrapped or retired, with half of those being retired having belonged to Transocean. Meanwhile, Transocean also pointed out that there are 99 jackup units being warm stacked and another 61 that have been cold stacked. This stacking and scrapping has taken out a big chunk of the industry's drilling fleet, which is what has been putting pressure on RigNet's revenue because fewer rigs need its services.

Looking forward 
There's limited visibility in the offshore drilling market right now, with the current view being that cold-stacked rigs won't be put back to work for a up to three years. That will likely mute RigNet's organic growth opportunities for a while. However, the company sees the potential for acquisitions, such as its recent one in Mexico, to offset some of this weakness. With a focus on right-sizing its costs and a strong financial position, RigNet is well positioned to take advantage of the opportunities that could come its way in the coming years.