Transocean Inc. (RIG) – the world’s largest offshore driller – reported weak second quarter 2010 results, primarily under the influence of increased expenses associated with the Gulf of Mexico accident. Earnings per share, excluding certain charges, came in at $1.66, failing to meet the Zacks Consensus Estimate of $1.69 and the year-earlier adjusted profit of $2.79.
Including certain one-time items, earnings per share in the quarter were $2.22, down 10.8% year over year.
However, the unsatisfactory results were somewhat better than the loss that BP Plc (BP) faced in the quarter. BP Plc was the other company that was heavily involved in the Gulf of Mexico disaster.
Revenue
Total quarterly revenue of $2.51 billion missed the Zacks Consensus Estimate of $2.56 billion. It was down 13.1% year over year and 3.7% sequentially, mainly due to a reduction in contract drilling sales (due to stacking of rigs), lower day-rate contracts of operating rigs and increased rig time in shipyard/mobilizations, partially offset by contributions from newly constructed ultra-deepwater rigs.
Transocean’s high-spec floaters contributed approximately 54.2% to total revenue, while mid-water floaters and jack-up rigs accounted for 20.8% and 16.2%, respectively. The remaining revenues came from other rig activities, integrated services and others.
Operating Statistics
During the quarter, the company’s operating income totaled $957 million, down 14.6% year over year. Operating and maintenance expenses were $1.36 billion, 13.5% higher sequentially, primarily reflecting the escalated costs from insurance deductibles and legal expenses related to the Macondo well incident, and an increase in additional operating costs for the newly-constructed ultra-deepwater rigs.
Dayrates & Utilization
Average dayrates increased 11.1% year over year to $284,200, as high-spec floater dayrates gained 12.6% and mid-water floater dayrates were up 5.4%. Compared with the March quarter of 2010, dayrates fell 4.7%. All types of rigs apart from high-spec floaters experienced decreased dayrates.
Overall, fleet utilization was 64% during the quarter, compared with 66% in the prior quarter and 84% in the year-ago quarter.
Backlog
As of July 15, 2010, Transocean’s contracted backlog was $27.6 billion, down from $28.9 billion at the end of the preceding quarter. The reduction of backlog from drilling activity was partially offset by the execution of new contracts with approximately $1.4 billion of associated backlog during the quarter.
Capital Expenditure & Balance Sheet
Capital expenditures during the quarter totaled $300 million versus $947 million in the prior- year quarter, with the change primarily related to lower costs associated with the construction of ultra-deepwater floaters.
As of June 30, 2010, Transocean had cash in hand of $2.89 billion and total debt of approximately $11.43 billion (representing a debt-to-capitalization ratio of approximately 35.6%).
Gulf of Mexico Update
Following the Deepwater Horizon tragedy, the U.S. government enforced a six-month moratorium on certain drilling activities in the U.S. Gulf of Mexico, which will be in effect until November 30, 2010. With 14 rigs under contract in the U.S. Gulf of Mexico, Transocean may lose up to $2.1 billion of backlog due to the possible termination of contracts by customers.
2010 Guidance
Transocean expects market utilization to remain steady over the next few quarters for the jackup and midwater floater markets based on the continued stability in oil and gas prices.
For 2010, Transocean is guiding toward capital expenditures of approximately $1.4 billion, of which $777 million will go for the construction and conversion projects.
Our Recommendation
Transocean is currently rated as Zacks #4 Rank (Sell), implying that the stock is expected to perform below the broader U.S. equity market over the next one to three months.
This reflects our bearish outlook for the company’s revenues and earnings over the next few quarters, given the global economic weakness, a slower demand growth for oil and gas, saturation of the floating rig market, overcapacity in the jackup market and liabilities from the Horizon incident.
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
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