In the shadow of last week’s pleasant earnings surprise from Diamond Offshore Drilling Inc (NYSE:DO) and with the echoes of last quarter’s earnings beats from Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB) still ringing, it would be easy to assume Transocean LTD (NYSE:RIG) would fall in line with its peers when it reported its Q4 numbers on Tuesday.
And yet, while that assumption would turn out to be partially correct, it was a dubious partial victory which ultimately proves more problematic than encouraging to current and would-be owners of Transocean stock. The oil driller’s recently completed quarter raises more red flags than just the revenue shortfall.
RIG Stock Earnings Recap
For the quarter ending in December, Transocean turned $629 million worth of revenue into an operating loss of 24 cents per share.
The good news is that analysts were collectively looking for a loss of 27 cents per share. The bad news is that those same analysts were calling for revenue of $633.7 million.
Contract drilling revenues of $589 million were down from the year-earlier tally of $699 million, though not for a lack of business. Indeed, RIG’s backlog now stands at $900 million taller than it did a year ago. Rather, the decline in drilling revenue was the result of fewer operating days during the quarter and an unexpected shutdown of its Petrobras 10000 rig.
And yet, that explanation doesn’t entirely pass the proverbial smell test, particularly when looking at some of the quarter’s metrics.
The Devil Is in the Details
In its defense, though crude oil prices improved from less than $44 per barrel in mid-2016 to a recent high of $66, it’s still a tough business to be in.
The aforementioned Schlumberger and Halliburton both widened their operating profits last quarter, but neither is back to their glory days of 2014. Meanwhile, Transocean’s close cousin Diamond Offshore Drilling is still booking occasional losses, underscoring how tough the seaborne drilling game still is.
In the meantime, Transocean is looking to shrink its way to profitability, disposing of assets last year that ultimately shaved $1.6 billion off the GAAP bottom line while simultaneously crimping the company’s capacity to generate revenue. But, RIG continues to sit on drilling rigs it’s not entirely clear it needs.
As was noted, the temporary Petrobras 10000 shutdown hurt. It wasn’t a devastating blow, though. It’s still got 46 other rigs of various sizes at its disposal, some in use, and others not.
Last quarter’s revenue efficiency fell to 92.7%, meaning the company was using a smaller portion of its fleet than it had used at any point in the past several quarters. For perspective, Q3’s revenue efficiency was 97.1%.
That dip can’t entirely be blamed on one rig’s shutdown late in the quarter, and the efficiency measure isn’t adversely impacted by the calendar — at least not to that degree. Something else seems to be in play.
That something else may well have been explained by Maersk on Tuesday. The shipping company opined that, despite the rebound in oil prices, drilling profits remain suppressed. And they may not recover until 2019. Maersk’s outlook underscores the premise that profits and revenue aren’t the same thing.
The outlook also calls into question the benefit of Transocean’s growing backlog, even more so than its waning revenue efficiency.
Looking Ahead for Transocean Stock
A reason to steer clear of Transocean stock? Call it another reason. There were already good reasons to opt for most other names in the energy sector.
It’s also not permanent pessimism. If the global economy remains robust and if the sector as a whole remains disciplined enough to not repeat the same overproduction mistake it made in 2014, drilling earnings may well improve the way Maersk expects them to next year.
That could be a long and risky wait, however, and there’s no solid assurance that RIG will be able to fully utilize its entire fleet the way it had been deployed in late 2016 and early 2017 if and when the time comes.
In other words, there are likely to be far better prospects for your investment capital that Transocean stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @jbrumley.