Transocean’s Dive Into Deepwater Is Paying Off

by Aaron Levitt | May 9, 2013 2:10 pm

It’s been an interesting ride at the world’s largest offshore drilling contractor Transocean (NYSE:RIG[1]).

The firm was the owner of the Deepwater Horizon — you know, the rig that exploded and sank in the Gulf of Mexico in 2010, killing 11 people and setting off the worst offshore oil spill in U.S. history.

And while BP (NYSE:BP[2]) has felt the brunt of that legal responsibility[3] and PR nightmare, Transocean wasn’t completely off the hook. As such, RIG floundered as the offshore drilling ban took place and investors tried to analyze just what legal penalties awaited the deepwater specialist.

However, since the company settled with the Justice Department for less than analysts expected, Transocean has gotten back to business drilling in the oceans depths.

And boy is business good.

In fact, Transocean’s latest earnings report highlights just how the company’s shift towards deepwater is paying off and — more importantly — how that focus will pay off over the long run for portfolios.

As Profits Climb …

Back in September, Transocean sold off 38 of its older shallow water jack-ups — rigs propped up on steel legs. That marked the operator’s exit from a market that it helped create more than 50 years ago. The company also started cutting positions and closing facilities tied to its onshore business more recently. All of this has transformed the oil service firm into a well “oiled” deepwater drilling machine[4].

That focus on deepwater is starting to benefit Transocean immensely, too. The latest earnings numbers for the driller showed a surge in profits as the year-earlier quarter included significant impairment and discontinued-operations losses. Overall, net income jumped to $321 million[5] or 88 cents a share compared to profits of just $10 million or 3 cents in the year earlier period. Meanwhile, revenue in the quarter grew 4% to $2.2 billion.

While earnings did miss analyst expectations by about 12 cents — the difference due to charges related to inspecting and replacing bolts on the blowout preventers in the Gulf — the quarter can be seen as a major win for the beleaguered deepwater driller.

Plus, as long-term global energy usage[6] shows no signs of abating, the E&P industry continues to delve even deeper into its search for petroleum. In doing so, day-rates for renting the most advanced drilling rigs have surged over the last year or so, in some instances topping $600,000 per day. The latest number of deepwater rigs operating in the U.S. Gulf of Mexico — according to Baker Hughes (NYSE:BHI[7]) — climbed 19% to an average of 50 during the first quarter.

Already, the company’s 91 rigs, including three high-specification jack-ups under construction, are considered to be some of the most state-of-the-art and thus command hefty rental fees. Those high rental fees have translated into revenue gains at the firm and drove the higher profits[8] this quarter.

That high tech fleet will continue to pay benefits, too. Many of RIG’s current jack-up rigs will begin to rollover into higher day rates as contracts are renewed.

To top it off, by selling its older shallow water and onshore operations, Transocean has been able to reduce its deprecation expenses and maintenance costs. Analysts peg these cost reductions should lead to annualized savings of about $300 million.

… Icahn May Back Off

Given Transocean’s profit jump and newfound focus on deepwater — which is working — retail and other institutional investors may now have some firepower to go against Carl Icahn. The company has been under siege from the activist investor, who is the company’s largest shareholder with 5.6% stake.

Icahn has urged RIG to declare a $4-a-share dividend and shake up the board, saying he believes shares are undervalued. Transocean suspended its dividend last year as it sought to raise cash[9] to pay for the Deepwater Horizon disaster.

With profits beginning to really come in as more deepwater drilling results in higher contracted day rates, the current board’s proposal of issuing a dividend of $2.24 per share as well as investment more into additional advanced ultra-deepwater ships is beginning to make more and more sense for shareholders.

Perhaps proxy service Egan-Jones summed up Transocean’s long-term vigor most eloquently when it said in a recent report: “Mr. Icahn’s Director nominees have no real plan for the company other than issuing an overly aggressive dividend that we believe would put the company’s credit rating at risk.”

The Bottom Line

All in all, Icahn maybe out for a quick buck, but you don’t have to be.

The long-term story at Transocean is just beginning to get good. Overall, the company’s focus on deepwater is beginning to play a substantial role in its profits making. While it may trade at discount to rivals like SeaDrill (NASDAQ:SDRL[10]) for now, it won’t stay that way for long.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

  1. RIG:
  2. BP:
  3. brunt of that legal responsibility:
  4. deepwater drilling machine:
  5. net income jumped to $321 million:
  6. global energy usage:
  7. BHI:
  8. higher profits:
  9. sought to raise cash:
  10. SDRL:

Source URL:
Short URL: