Transocean LTD (RIG), Seadrill Ltd (SDRL), Noble Corporation (NE): Who’s A Buy?

Transocean LTD (NYSE:RIG) owns the world’s largest deepwater and ultra-deepwater drilling fleets and provides offshore contract drilling services for oil and gas wells internationally. Smart investors are patient and focus on the big trend for the long term. Despite the disappointing numbers, Transocean LTD (NYSE:RIG) presents a good opportunity to buy on weakness to ride the uprising trend for offshore drilling while the company continues to maintain a strong backlog and secure new orders.

Numbers missing expectations

Revenue for Q1 grew 4% to $2.2 billion, which is $129 million lower as compared to Q4, 2012. The decrease was mainly due to lower revenue efficiency primarily on ultra-deepwater floaters (down to 83.8% from 95.5% in the prior quarter), partly offset by fewer out-of-service days.

Net income rose to $321 million ($0.88 per share) for Q1, which is up from $10 million ($0.03 per share) a year ago, when the company took a hefty charge on the value of its fleet. Excluding one-time items, Transocean LTD (NYSE:RIG) earned $0.93 per share, which is below the analysts’ estimate of $1.00 per share.

Cash status, backlog, and cost cutting

Operating cash flows were $106 million for Q1, significantly lower as compared to $923 million for Q4, 2012. The drop was due to working capital changes, including the first installment of $400 million (including interest) for the Macondo well incident. CapEx from continuing operation were $488 million for Q1, down from $657 million in Q4, 2012. The backlog remains solid where $28.5 billion of contract backlog was reported as of April 18. Since then, additional contracts totaling $199 million were secured. Transocean LTD (NYSE:RIG)’s backlog is higher than its peers, including Seadrill Ltd (NYSE:SDRL) and Noble Corporation (NYSE:NE). Seadrill Ltd (NYSE:SDRL) had a record high revenue backlog of $19.7 billion as reported in January, whereas Noble Corporation (NYSE:NE) had a revenue backlog of $14 billion according to the latest Q1 report.

As the company is trying to fend off a board challenge from activist investor Carl Icahn, the management announced that Transocean LTD (NYSE:RIG)’s cost-cutting effort would yield $300 million in savings by next year based on a preliminary analysis. The company should start to realize the cost savings in early 2014. Transocean LTD (NYSE:RIG) also divested 38 low-specification rigs in Q4, 2012 as the company continued to improve organizational efficiency. Although the cost saving can only be realized starting in 2014, Transocean LTD (NYSE:RIG)’s EPS is expected to raise in the next 4 quarters.