Takeaways From Transocean’s Q1 Earnings

Transocean (NYSE:RIG), one of the world’s largest drilling contractors, published a wider than expected Q1 loss amid continued headwinds in the market for ultra-deepwater rigs. While the company’s contract drilling revenues declined by about 10% year-over-year to $664 million as declines in day rates and utilization levels of its ultra-deepwater rigs offset the impact of its acquisition of Songa Offshore, the adjusted net loss widened to $210 million. Below, we provide some of the key takeaways from the company’s results.

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Ultra-Deepwater Headwinds Continue

Transocean’s bread-and-butter ultra-deepwater rigs continued to face headwinds. Although crude oil prices have witnessed a significant improvement over the last several months, leading to slightly higher offshore drilling activity, the oversupply of ultra-deepwater rigs in the market has kept the extent of the recovery in check for drilling contractors. Moreover, ultra-deepwater activity off Brazil, Mexico and West Africa has been relatively weak and there are a relatively limited number of deepwater projects on the horizon. These trends have impacted Transocean’s results, with utilization rates for ultra-deepwater floaters – the ratio of the number of rigs working on contracts to the total number of rigs – falling to 35% from about 36% a year ago and 39% in the previous quarter. Revenue efficiency, which is a measure of how much revenue a rig actually earns while it is contracted versus the maximum that it could potentially earn, fell by around 9.5% year-over-year to 88.3%. Average day rates for these rigs were also lower by about 26% year-over-year to $381,600.

However, the performance of the company’s other floaters, including harsh environment, deepwater and mid-water was more favorable, with these categories recording stable to improving average day rates and utilization levels. The harsh environment rig market in particular has been quite strong, driven by demand from the Norwegian sector. Transocean increased its exposure to this space, adding four harsh environment semisubmersibles on long‑term contracts as it closed its acquisition of Songa offshore earlier this year. The company now has a total of 12 harsh environment rigs.

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