Transocean Surprises The Market With Its 2017 Results And Rising Contract Backlog

Despite the continued weakness in the offshore markets, Transocean (NYSE:RIG) posted a strong set of financial results for its December quarter and full year 2017((Transocean Announces December Quarter 2017 Results, 20th February 2018, www.deepwater.com)), beating the market consensus for both revenue as well as earnings. This is the first time in the last three years that the company has witnessed an increase in its contract backlog, largely due to the closure of the Songa Offshore deal and accompanying new contracts. Being the world’s largest offshore drilling company, Transocean is likely to benefit the most from the anticipated recovery in demand for offshore drilling and services. We have a price estimate of $11 per share for Transocean, higher than its current market price. We will be updating our model shortly to reflect the company’s actual numbers and guidance going forward.

Below are the key takeaways from Transocean’s 4Q’17 earnings report using our interactive platform:

• On the operational front, Transocean’s revenue for the December quarter dropped both sequentially, as well as annually, due to fewer operating days and lower revenue efficiency during the quarter. This, coupled with continued pricing pressure in the offshore markets through the year, resulted in a decline in its full year revenues and earnings.
• However, after witnessing a decline in its contract backlog for over three years, Transocean’s backlog finally rose to $12.8 billion as of February 2018. This implies that the company continues to hold an industry leading backlog, which will enable it to maintain its dominant position in the market even in the near future.
• Having rationalized its fleet in the previous years, Transocean upgraded its fleet in 2017 by adding two newly built rigs – Deepwater Pontus and Deepwater Poseidon – both of which are backed by ten-year contracts. In addition to this, the company completed the acquisition of Songa Offshore, which added seven semisubmersibles to its fleet, including four harsh environment high-specification floaters with $3.7 billion of backlog. Also, the offshore driller divested its jackup fleet and retired nine other rigs during the year, allowing it to become a pure-play floater company. Thus, we believe that with an upgraded fleet and strong contract backlog, Transocean is well-placed to experience a rebound in the coming quarters.

Going Forward

• With the extension of the OPEC’s production cuts, the outlook for commodity prices has improved significantly. Since most of the oil and gas companies have managed to bring down their breakeven price to $50 per barrel or below, the deepwater drilling industry is experiencing an increase in floater contracting activity. Transocean, being the largest deepwater driller with a high-grade fleet, is likely to benefit from this recovery over time.
• While the demand in ultra-deepwater is likely to remain weak, the company expects demand for high-specification semisubmersibles in the harsh environment market to remain strong in the coming quarters, resulting in a meaningful improvement in dayrates.
• The company also anticipates an increase in activity in several parts of Africa, and in the Asia-Pacific region, particularly in India, Myanmar, Malaysia, and Australia, in the next 12-18 months. However, the company might continue to face some pricing pressure in these markets over the next few months, before it finally begins to recover to its historic levels.

Do not agree with our forecast? Create your own forecasts for Transocean and its 2017 performance using our interactive platform.

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