Transocean LTD: Can RIG Stock Survive?

Suffice to say, the collapse in oil prices has been pretty darn dramatic. And while that has significantly affected the bottom lines of the various producers of energy, it has absolutely killed the prospects for those firms that supply the needed equipment or services to extract crude oil and natural gas. One of the worst causalities has been Transocean LTD (RIG) stock.

transocean rig stockAs one of the premier deepwater drillers, RIG stock has been obliterated as the “lower for longer” oil price doesn’t make deepwater drilling worth it. And with RIG about to report earnings, we’ll continue to see how badly the sell-off in crude oil has effected Transocean’s bottom line.

Hint: It’s not going to be good.

However, it may not matter for the deepwater driller. Longer-term, higher oil prices are on the horizon. For Transocean’s latest earnings report, it’s all about its liquidity and debt situation and whether it can survive until that point.

The Future of RIG Stock

Excluding that little mishap in the Gulf of Mexico with BP plc (ADR) (BP) back in 2010, things have actually been not so bad for RIG. Day rates for its super advanced and ultra-deepwater drilling rigs and ships were climbing north of $600,000 per day to rent. And with oil prices well above $100 per barrel, offshore producers were willing to pay those rates to get at the various stores of hydrocarbons locked deep within the ocean’s floor.

And then global supplies got out of hand and prices for crude plunged — hard. That left RIG stock — along with rivals like Seadrill Ltd (SDRL) and Noble Energy, Inc. (NBL) — holding the bag in a big way.

RIG and the rest of the deepwater and offshore drillers have deteriorated. In many instances, it doesn’t make financial sense — thanks to high breakeven points — to drill in the deepest parts of the ocean anymore for crude oil. Oil companies continue to cut capex to these offshore fields in droves. That’s left an overabundance of drilling rigs on the market. Day rates have plunged in response to this fact. And at the end of the day, RIG has seen its earnings decline tremendously. Analysts only expect Transocean to report earnings per share of just 73 cents this quarter and 32 cents next quarter. That’s down from 95 cents and $1.10 in the year ago periods, respectively.

And the situation seems to be getting worse for RIG stock and other holdings in the deepwater drilling space.

In their effort to save even more capex, oil producers are actually now willing to pay fees and break contracts for drilling rigs. And it’s not just small fries — Royal Dutch Shell plc (ADR) (RDS.A, RDS.B) recently cut ties with Transocean and Petroleo Brasileiro SA Petrobras (ADR) (PBR) is on the cusp of doing so.

Rig operators are willing do the unthinkable as well. Namely scrap drilling rigs rather than cold-stack them in storage. The industry has scrapped more 40 drilling rigs since the oil price downturn started in 2014. Transocean has been a huge proponent on that front and has shed 19 different rigs and drill-ships from its arsenal.

And while the cuts to contracts and scrapping of rigs does seem like the end is neigh for RIG stock and the sector, there is a silver lining. One that should help Transocean avoid becoming the next Paragon Offshore PLC (PGNPF) or Hercules Offshore, Inc (HERO).

For Transocean, It’s All About Paying Debts

There are no ifs, ands or buts about it, Transocean is going to show a year-over-year decline in profits. Oil prices and producers’ capex spending have only gotten worse over the last few years. But investors shouldn’t be focusing on those earnings numbers. They should be looking at RIG’s liquidity and ability to kick the can down the road until oil rebounds.

RIG has a surprisingly decent amount of cash on its books — $2.23 billion at the end of last quarter. Transocean also has access to a pretty robust short-term credit facility. That cash will only get boosted by the dour situation facing its deepwater rigs.

Canceled contracts come with some pretty hefty fees. Those cancellations essentially front-load RIG’s balance sheet with some extra cash. Sure, there won’t be a steady stream of cash down the road. But that cash today is still really important to keep RIG stock afloat.

That’s because it’ll allow Transocean to pay down some of its $8 billion in debt.

Already, the firm has made significant progress paying down its large debt load over the last few years. With much of its debt trading for below par, buying it back at a discount is a huge win for the firm. Using that excess cash to buy back its own debt allows RIG to remove much of its survival liability off the table. Even more so, when you consider that despite earnings declines, Transocean is still profitable.

Again, the point is to kick the can long enough until things get better.

Bottom Line: Anyone keeping an eye on RIG stock should ignore the earnings noise and focus on what the firm is doing about its larger debts. Any mention of a debt buyback is the real key for Transocean’s earnings report.

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

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