Deepwater drillers have been absolutely obliterated in the oil price collapse, and the poster child for the sector, Transocean (RIG), has gotten the brunt of investor’s scorn.
It’s very expensive to drill in the deepest parts of our ocean and with oil now under $50 per barrel, it just doesn’t make a lot of financial sense for E&P firms to tackle such projects.
That’s bad news for firms like RIG, who have spent millions of dollars outfitting themselves with the latest in high-tech (AKA expensive) drilling rigs to rent.
As such, the past few quarters have been terrible for Transocean. RIG stock is down 30% so far this year. And with oil prices still in the toilet, you’d expect things at Transocean to remain pretty ugly.
However, the latest earnings report showed that even slightly-better-than-bad news is good news for deepwater drillers.
Transocean Earnings Impress on the Surface
Transocean boasts the world’s largest portfolio of offshore drilling rigs. The problem is that most of the expansion happened when oil was in the triple digits. With oil down to lows not seen in about five years, that large fleet of drilling rigs and ships is a huge albatross around RIG’s neck.
Since the crash and oil’s drop from around $115 per barrel, Transocean has done everything it can under its “fanatical cost-cutting” plan to stay afloat. This included drastically cutting its $3 dividend down to 60 cents per share, cold-stacking and even scrapping rigs, putting assets up for sale and reducing its capital spending programs.
Well, it looks like those cost cutting measures are started to pay off.
For the quarter, Transocean reported second-quarter profits of $342 million or 93 cents per share. Kicking-out non-recurring items and one off charges, Transocean’s earnings looked even better at $1.11 per share. Revenues clocked in at $1.88 billion. Those numbers are actually pretty impressive considering just how much oil has plunged and how little energy firms are drilling in the deepwater.
In fact, they were impressive enough to surprise analysts covering RIG stock. According to Thomson Reuters, analysts had only been expecting Transocean to make about 50 cents per share on about $1.7 billion in sales. Transocean credited the beat to better cost cutting and additional savings via its MLP, Transocean Partners (RIGP).
The earnings beat wasn’t the only positive piece of RIG’s earnings report. Transocean did manage to snag about $187 million in new contracts and now has a contract backlog of $18.6 billion. Likewise, cash flows at the firm remain positive and increased during the quarter.
Needless to say, the earnings beat and other pieces of good news made investors very happy and RIG shares managed to pop about 4% afterhours. However, investors may not want to get too giddy with regards to Transocean and RIG stock.
Still Plenty of Holes in Transocean’s Hull
To start with, Transocean earnings were actually lower than this time last year … by a lot. Try a whopping 41%. This time last year, Transocean’s earnings came in at $587 million, or $1.63 per share on sales of $2.3 billion on unadjusted numbers. So RIG isn’t making nearly as much as it did last year. Declining sales and profits are never a good thing.
Secondly, the one-off charges it faced this quarter are because of some very real issues: impairment charges and write-downs for its Midwater Floater asset group. Transocean took charges of more than $800 million or about $2.21 per share because there is no more market for floaters.
While it did see some new contracts, Transocean’s backlog has actually decreased over the last two quarters. Additionally, the driller’s utilization rate declined from 79% in the first quarter to 75% in the second. That basically means that oil companies are using the rigs less often, which results in lower day-rates, higher costs and an increased potential for future scrapping of rigs.
Balancing out the impairment charges were a positive boost from its legal liability in the Deepwater Horizon disaster with BP (BP). Transocean owned the rig in the spill and recently won a tidy sum from settlement agreements and insurance recoveries. The problem is that these payments are a one-time shot. They won’t be there to balance out the declines other charges in the future. In reality, you’re looking at a much deeper hole than what the earnings beat is telling us.
The Bottom Line: While the latest Transocean earnings report looks good on the surface, it still shows that nothing has really improved at the deepwater driller. Conditions in the sector continue to be middling at best. Investors looking at RIG stock need to realize that Transocean’s turnaround may be quite faraway. The earnings “beat” isn’t really a step towards that turnaround.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
