Transocean: Will It Make a Comeback?RIG) announced second quarter ended June 30, 2016 total operating revenue of $943 million, down 50 percent year-over-year from $1.88 billion during the same period last year.
Transocean declared second quarter of 2016 adjusted net income of $77 million or $0.21 per diluted share, down 78 percent year-over-year from $342 million or $0.93 per diluted share in second quarter of 2015.
The global offshore energy drilling Services Company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with the rising drilling and exploration expenditures, eating into the company’s key margins.
A closer look at operations
Transocean has significantly cut down on its exploration schedules owing to the globally weaker oil pricing scenario, worldwide E&P companies are keenly focused on maintaining solid cash position while minimized near-term production and other costs.
The other graph depicts consolidated fiscal year 2015 projected earnings of XOM, Chevron, Shell and BP that is the weakest since 1998.
Image by gloriaurban4 / Pixabay
For Ultra-Deepwater operations, worldwide fleet utilization was recorded at 78% with continuing delays and cancellations of uncontracted newbuild. For Deepwater operations, international fleet utilization was registered at 58% with only limited growth prospects and weak drilling activities. For Midwater operations, worldwide fleet utilization was recorded at 72% with accelerated retirements of key rigs and finally, for High-Spec Jackups, international fleet utilization was registered at 68% with continuously declining Dayrates with intensifying oversupply.
The ongoing weaker global commodity demand and pricing environment has forced Transocean to cut back on its core and non-core capital expenditures while preserving cash to continue with its daily operations profitably.
Transocean is believed to be having an industry-leading contract backlog position with a total backlog of about $13.7 billion and including, approximately 90% investment grade companies in the backlog. This impressive backlog position allows for strong cash flow generation for the company.
Further, Transocean illustrated a notable $5.2 billion of net liquidity position as of June 30, 2016 and including, $2.2 billion in cash along with $3.0 billion of undrawn revolving credit facility. Importantly, the company has uniquely deferred capital expenditure for the quarter while demonstrating superior access to the global capital markets with robust cash flow delivery and operational performance.
Trying to overcome the weakness
Transocean is attractively implementing newer cost-optimizing solutions driving reduced repair and maintenance costs while achieving below $20k/day/rig of DP stacking costs through strategic reshuffling of its fleet mix, increasing the number of Ultra-Deepwater Floaters and High-Specification Jackups count while reducing the rig count for Harsh Environment Floaters and Deepwater & Midwater Floaters. Under current fleet, Transocean is presently developing 5 Ultra-Deepwater Drillships and 5 other High-Specification Jackups while already having retired about 26 non-performing floaters. Moving ahead, fiscal year 2020 estimated fleet comprises of 5 Ultra-Deepwater 20k psi equipped rigs, 8 Ultra-Deepwater DP & moored equipped rigs along with 11 Ultra-Deepwater dual BOP rigs.
The global offshore energy drilling company is expected to actively manage its overall liquidity position and improve the capital structure through continued cost-optimization efforts being undertaken by the company. Transocean promises on delivering the most efficient and safe drilling services while focusing on delivering robust operational results through streamlining of operations, delivering attractive and industry-leading revenue efficiency and uptime and developing strong customer relationships.
The notable and industry-leading contract backlog position of Transocean is expected to deliver sustainable long-term company growth being supported by its active cost-optimization initiatives while delivering attractive shareholder returns in a long run.
Overall, the investors are advised to “Hold” their position in Transocean Ltd. considering the company’s significant long-term growth prospects but currently weaker financial position with poor total cash of $2.15 billion against huge total debt position of $8.22 billion, restricting the company to continue with its daily operations profitably. The profit margin of 24.71% seems impressive. However, the PEG ratio of -0.13 appears misguided and signifies no growth but decline.
Published on Sep 6, 2016By Vinay Singh