Transocean Still Battling GoM Spill - Analyst Blog

Transocean, Inc. (RIG) – the world's largest offshore driller – reported weak third quarter 2010 results, hurt by decline in utilization rates and average daily revenue resulting from curbs on U.S. offshore drilling.  

Earnings per share, excluding expenses associated with the Macondo well incident and debt retirement costs, came in at $1.36, 3 cents below the Zacks Consensus Estimate. In the year-ago period, the company earned $2.65 (on an adjusted basis).

Switzerland-based Transocean, which has been in the news since the disastrous blowout and oil spill in the Gulf of Mexico (“GoM”), suffered from the uncertainty in the deepwater drilling market. The company has already warned investors regarding the risks associated with the Horizon rig disaster, including legal costs, government investigations and lost revenue.

As a reminder, in April, Transocean's ultra-deepwater Horizon drilling platform, contracted to British major BP plc (BP), sank following an explosion while operating in the U.S. GoM off the coast of Louisiana. The incident killed 11 workers and spewed more than 200 million gallons of crude in what is touted as the worst oil spill in U.S. history. Subsequently, a six-month moratorium (which was supposed to be in place till November 30 but was lifted on October 12) was imposed on offshore drilling in the region at water depths of more than 500 feet.

Revenue

Total quarterly revenues of $2.3 billion missed the Zacks Consensus Estimate by 6.1% and were down 18.2% year-over-year, mainly attributable to reduction in contract drilling sales (due to lower utilization and lower average daily revenue), partially offset by contributions from newly constructed ultra-deepwater rigs.

Transocean's high-spec floaters contributed approximately 54.1% to total revenue, while mid-water floaters and jack-up rigs accounted for 24.8% and 16.3% of the total, respectively. The remaining revenue came from other rig activities, integrated services, and others.

Operating Statistics

During the quarter, the company's operating income totaled $645 million, down 32.6% year-over-year. Operating and maintenance expenses were $1.2 billion, 13.1% lower than the third quarter of 2009, primarily reflecting reduced litigation expense, lower utilization, weak activity levels, somewhat offset by commencement of newbuild operations, increased shipyard project costs, and costs associated with the Macondo well incident, net of insurance recoveries.

Dayrates & Utilization

Average dayrates decreased 4.6% from the June quarter to $271,200, as high-spec floater dayrates lost 9.8% and high-spec jackup dayrates were down 5.5%, partially offset by a 3.0% improvement in mid-water floater dayrates.

Compared to the third quarter of 2009, dayrates fell 4.4% (from $283,800 to $271,200), adversely affected by lower dayrates among all types of rigs. In particular, high-spec jackup dayrates were down 14.2%, while standard jackups decreased 27.5%.

Overall fleet utilization was 64% during the quarter, flat from the prior quarter level but down 11% from that achieved during the third quarter of 2009.

Backlog

At the end of October 14, 2010, Transocean's contracted backlog was $26.1 billion, down from $27.6 billion as of July 15, 2010 reflecting the company's inability to obtain new rig contracts to adequately replace the existing backlog as it gets consumed over time or if any contracts are terminated. Transocean has already acknowledged $590 million in lost backlog related to the drilling contract under which its ultra-deepwater floater ‘Horizon' was operating.

Capital Expenditure & Balance Sheet

Capital expenditures during the quarter totaled $304 million versus $540 million in the prior-year quarter, with the change primarily related to lower costs associated with the construction of ultra-deepwater floaters. As of September 30, 2010, Transocean had cash in hand of $4.6 billion and total debt of approximately $12.8 billion (representing debt-to-capitalization ratio at approximately 38.0%.

2010 Guidance

For 2010, Transocean is guiding towards capital expenditures of approximately $1.3 billion, of which $698 million will go towards the construction of newbuild rigs. The remaining amount has been allocated for certain upgrades as decided in the contract and sustaining capital expenses.

Outlook

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, which is also expected to create contracting opportunities for the remainder of 2010 and throughout 2011.

However, considering the potential impact of the uncontracted newbuilds and existing units in the market, together with the uncertain environment surrounding the recently lifted offshore drilling ban in the U.S. GoM, utilization for Transocean's high-spec floater fleet is expected to remain tentative. As such, the increased tendering activity (that is being currently experienced) may not lead to a corresponding increase in dayrates in the near term.

Our Recommendation

Transocean shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
Zacks Investment Research