Is Transocean a Bad Bet?
The on-going cost reduction efforts at Transocean (RIG) have certainly yielded incredible results. The operating and maintenance expenses were slashed down on a sequential as well as year-on-year basis. The G&A expenses did increase significantly but then they make a very tiny portion of total costs. Combined, the O&M and the G&A expenses were down to 46 % of the revenue for the quarter, from 61.4 % of the revenue in the same quarter last year. Although this is an improvement shown based on the numbers reported by the company, any deeper analysis would require removal of costs and revenue associated with the cancelled contracts.
On the cost front, there was an improvement of $ 86 million in the operating and maintenance expense sequentially to $ 794 million primarily due to lower activity and the impact of the company's actions to reduce onshore and offshore costs. The capital expenditure also decreased sequentially from $ 940 million to $ 665 million. The interest expense, net of amounts capitalized, decreased $ 22 million sequentially to $ 87 million, reflecting, in part, the company's early debt retirements.
Further, the capital expenditure has also come down significantly by about 30 % due to its newbuild program.
Debt and liquidity:
Transocean Ltd. has $ 2.7 billion of cash on its hands against $ 8.5 billion of debt burden on its shoulders. Transocean has reduced its total debt from $ 10 billion down to about $ 8.5 billion since the end of 2014. In fact, in the two months of this year itself, it has paid out $ 260 million. Now, Transocean has $ 1.09 billion due within the next year which it can comfortably arrange given its current cash position, reduced CAPEX and sufficient working capital ($ 2.1 billion). Plus, it also has access to a $ 3 billion borrowing capacity under its revolving credit facility. Also, Transocean is generating sufficient cash flows from its operations despite the big oil companies reducing activity and even terminating some uncompensated contracts. Hence, its liquidity position is quite solid and comfortable.
Transocean’s fourth quarter results look exciting at the first glance. However, upon diving deeper into the numbers we find that the actual progress made by Transocean is relatively smaller than what it appears to be from the reported numbers. On one hand, the on-going cost reduction efforts and the debt and liquidity management tactics are laudable. But on the other hand, the contract terminations and declining backlogs aren’t good signs for the company’s long-term success.