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.
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.
Analysts’ calls and estimates
Analysts, on average, are estimating an EPS of $4.65 with revenue of $9.92 billion for 2013, which is 7.80% higher than 2012. For 2014, analysts are expecting an EPS of $5.83 with revenue of $10.86 billion, which is 9.50% higher than 2013. Overall, analysts currently have a mean target price of $60.19 for Transocean.
Fundamentally, Transocean’s key stats will be compared to its peers in the industry of oil & gas drilling, including Seadrill Ltd (NYSE:SDRL) and Noble Corporation (NYSE:NE), to see where it stands.
| Transocean | Seadrill | Noble Corporation | Industry Average | |
|---|---|---|---|---|
| Market Cap | $19.87 billion | $19.19 billion | $10.10 billion | N/A |
| P/E | 24.1 | 17.1 | 18.0 | 38.3 |
| Revenue Growth (3 Year Average) | -7.3 | 11.2 | -0.9 | -1.1 |
| Net Margin, %, ttm | -2.4% | 24.7% | 14.8% | -0.4% |
| ROE | -1.4 | 19.3 | 7.2 | -0.2 |
| ROA | -0.6 | 5.8 | 3.8 | -0.1 |
| Debt/Equity | 0.7 | 1.6 | 0.6 | 0.5 |
Source: Morningstar
Seadrill Ltd (NYSE:SDRL) provides offshore drilling services to the oil and gas industry internationally. Seadrill Ltd (NYSE:SDRL) aggressively leverages its balance sheet to upgrade and expand its rig fleet. As a result, Seadrill Ltd (NYSE:SDRL) now owns the most advanced fleet with improved safety and it enjoys higher revenue growth as compared to the industry average. Seadrill continues to generate stable quarter EBITDA and has been increasing its dividend distribution since 2010. By securing near $2.3 billion of new contracts and commitments in Q4, 2012, Seadrill is expected to report growing revenue for Q1, 2013 on May 13, 2013. Analysts are expecting 8.50% year-over-year sales growth; however, investors need to be aware that Seadrill had 3 consecutive negative earnings surprises in the last 3 quarters.
Noble Corporation (NYSE:NE) also provides offshore drilling services for the oil and gas industry and is expanding into the deep-water end. With a less leveraged balance sheet, 80% of Noble Corporation (NYSE:NE)’s backlog comes from two key customers: Shell and Petrobras. By establishing the close relationship with its key customers, Noble Corporation (NYSE:NE) could achieve more price stability as compared to other peers. As reported in the latest Q1 report, Noble has a revenue backlog of $14 billion as of March 31, 2013, where 81% of the backlog is from Noble’s semi-fleet and drillship fleet and 19% is from the jackup rig fleet. Similar to Transocean, Noble also has a solid backlog.
Due to the effect of Macondo well incident, Transocean’s numbers are well below the industry averages. However, Transocean is expected to recover and will continue to resume its growth with the world’s largest deepwater and ultra-deepwater drilling fleets.
The bottom line
With disappointing numbers due to weaker revenue efficiency, more volatility is expected for Transocean in the near-term. However, as the recovery continues for Transocean and the demand for offshore exploration grows, more upside is expected for Transocean in the long-term.
The article Buying on Weakness for This Offshore Drilling Provider originally appeared on Fool.com and is written by Nick Chiu.
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