Transocean: A Look at the Positives

Transocean (RIG) has done well in the face of adversity. The drilling services contractor has been able to improve its revenue efficiency and adjusted EBITDA despite end-market weakness. In fact, its revenue efficiency is quite consistent and has stayed above 95% for the last five to six quarters, with continued improvement in the EBITDA margins periodically.

So, it is very clear that the company has adjusted its activity levels to the current oil commodity cycle that are capable enough to deliver returns and drive value for its shareholders.

Industry leading backlog will drive its growth in the future

Transocean has robust backlog of over $18 billion.
This is probably the best in the industry and it should provide better visibility of its earnings and cash flow performance in the future. In fact, the majority of its backlog is in the long-term contract that should help the company to stand tall in spite of the downturn in the oil and gas market.

Moreover, Transocean has been able to significantly reduce its operating costs and expenses over the last couple of quarters. It has reduced its operating and maintenance costs across its portfolio. It has delivered operating and maintenance cost reductions of about 10%, 9%, 19%, and 18%, respectively, for its ultra deepwater, harsh environment floaters, and deepwater and midwater floaters.

In addition, the company has reduced its service costs significantly. In service costs, its total rig operating costs have declined approximately 12% to $559 million from $637 in the first quarter of 2015. Also, Transocean’s out of service costs & stacked and idle costs have dropped 11% to $279 million from $312 million in the last quarter.

Looking ahead, the company expects its full-year operating and maintenance cost in the band of $3.7 billion–$3.9 billion. This projected figure is approximately 27% lower than its operating costs of $5.1 billion and $5.6 billion in 2014 and 2013, respectively.

Transocean’s strong liquidity position to support its growth in the future

Transocean has a strong liquidity position of $5.7 billion. At present, it has total cash of $3.77 billion and $3 billion of undrawn revolving credit facility. It has operating cash flow of $3.28 billion and free cash flow of $597.75 million.

The company has total debt outstanding of $10.02 billion. So, this strong liquidity position should help Transocean to improve its fleet quality, invest in high-specification rigs, and benefit from these investments in the long run.

Conclusion

Transocean looks attractive as it continues to deliver profits at the current oil price set up. Also, it has a strong backlog in place that clearly highlights its ability to deliver profits and cash flow in the future. Moreover, the company is continuously reducing its operating costs and expenses that should enable it to drive its bottom line performance. Hence, Transocean is making a number of positive moves that will allow it to continue improving in the long run.
Published on Oct 12, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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