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Summary

  • Revenue increased 7% while earnings per share increased 51%.
  • The stock is inexpensive based on 2015 earnings estimates.
  • The company was able to reduce overall costs by 6% from last year.

The last time I wrote about Transocean Ltd. (NYSE:RIG) I stated:

"Due to the ambiguous technicals, earnings estimates getting cut dramatically, and uncertainty around the dividend I will not be pulling the trigger here right now." Since that article was published the stock is up 6.88% while the S&P 500 (NYSEARCA:SPY) is up 0.34% and it's pretty safe to say that I missed out on a good move upwards. Transocean is an international provider of offshore contract drilling services for oil and gas wells by operating in contract drilling service and drilling management services business segments.

The company reported earnings after the market closed on 07May14 and on the surface the results were great with the company reporting earnings of $1.43 per share (beating estimates by $0.41) on revenue of $2.34 billion (beating estimates by $70 million). The stock increased 3.25% in after hours trading and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Ultra-Deepwater Floaters

$ 1,197

$ 1,098

$ 1,047

9%

14%

Deepwater Floaters

$ 259

$ 255

$ 254

2%

2%

Harsh Environment Floaters

$ 286

$ 283

$ 282

1%

1%

Total High Specification Floaters

$ 1,742

$ 1,636

$ 1,583

6%

10%

Midwater Floaters

$ 411

$ 429

$ 429

-4%

-4%

High Specification Jackups

$ 135

$ 143

$ 124

-6%

9%

Contract intangible revenue

$ 4

$ (6)

$ 9

-167%

-56%

Total contract drilling revenues

$ 2,292

$ 2,202

$ 2,145

4%

7%

Client reimbursable revenues

$ 44

$ 42

$ 39

5%

13%

Integrated services and other

$ 3

$ 8

$ -

-63%

N/A

Drilling management services - non-US

$ 80

-100%

N/A

Total other revenues

$ 47

$ 130

$ 39

-64%

21%

Total revenues

$ 2,339

$ 2,332

$ 2,184

0%

7%

Upon first glance at the revenue segment of the earnings report I see a 14% increase from last year with respect to the Ultra-deepwater Floaters. Ultra-deepwater rigs are the largest and deepest rigs drilling 7,500 feet and greater into the ocean floor and accounted for 51% of total revenues this quarter. The increase in the Ultra-deepwater Floaters segment led to an overall 10% increase in revenues for Total High Specification Floaters. This quarter saw an increase of 7% in total contract drilling revenues. On the whole, total revenues increased by the same 7% from last year but were relatively flat from last quarter.

Income Statement

Income Statement

1Q14

4Q13

1Q13

Q/Q

Y/Y

Revenues

$ 2,339

$ 2,332

$ 2,184

0%

7%

Operating and maintenance

$ 1,269

$ 1,532

$ 1,356

-17%

-6%

Depreciation

$ 273

$ 275

$ 275

-1%

-1%

General and administrative

$ 57

$ 75

$ 67

-24%

-15%

Total costs and expenses

$ 1,599

$ 1,882

$ 1,698

-15%

-6%

Loss on impairment

$ (65)

$ (27)

$ -

141%

N/A

Gain on disposal of assets, net

$ (3)

$ (16)

$ (7)

-81%

-57%

Operating income

$ 672

$ 407

$ 479

65%

40%

Interest income

$ 10

$ 13

$ 17

-23%

-41%

Interest expense, net of amounts capitalized

$ (126)

$ (139)

$ (157)

-9%

-20%

Other, net

$ (2)

$ (7)

$ (1)

-71%

100%

Total other income

$ (118)

$ (133)

$ (141)

-11%

-16%

Income from continuing operations before income tax expense

$ 554

$ 274

$ 338

102%

64%

Income tax expense

$ 80

$ 46

$ 20

74%

300%

Income from continuing operations

$ 474

$ 228

$ 318

108%

49%

Income from discontinued operations, net of tax

$ (8)

$ 7

$ (5)

-214%

60%

Net income

$ 466

$ 235

$ 313

98%

49%

Net income attributable to noncontrolling interest

$ 10

$ 2

$ (8)

400%

-225%

Net income attributable to controlling interests

$ 456

$ 233

$ 321

96%

42%

Average diluted shares

361

361

360

0%

0%

GAAP Income per diluted share

$ 1.26

$ 0.65

$ 0.89

96%

42%

Non-GAAP Litigation matters

$ 0.01

$ 0.03

$ 0.14

-67%

-93%

Non-GAAP loss from discontinued operations

$ (0.02)

$ (0.01)

#DIV/0!

100%

Non-GAAP One-time termination benefits

$ 0.01

-100%

N/A

Non-GAAP Termination of GW5 lease

$ 0.01

-100%

N/A

Non-GAAP Loss on impairment of assets

$ 0.19

$ 0.07

171%

N/A

Non-GAAP Gain on disposal of assets in discontinued operations

$ 0.03

$ (0.01)

$ (0.04)

-400%

-175%

Non-GAAP Loss (income) from discontinued operations

$ (0.01)

$ (0.01)

$ 0.06

0%

-117%

Non-GAAP Discrete tax items and other, net

$ (0.04)

$ (0.01)

$ (0.10)

300%

-60%

Non-GAAP income per share

$ 1.42

$ 0.74

$ 0.94

94%

51%

After seeing a 7% increase in the top line I'd expect to at least see the same thing on the bottom line, and from first glance investors received a boost of 51% to the bottom line. Now let's see why the huge discrepancy in percentage increases took place between the top and bottom lines. Well, General and Administrative decreased by 15% which helped total costs and expenses decrease by 6%. Overall operating income increased by 40% and after taking into consideration interest income/expenses and deducting taxes, the company increased continuing operations income by 49%! Then after factoring a few non-GAAP items we see how the company achieved a 51% increase in earnings per share.

Balance Sheet

Balance Sheet

1Q14

4Q13

Q/Q

Cash and cash equivalents

$ 1,987

$ 3,243

-39%

Trade

$ 2,217

$ 2,112

5%

Other

$ 50

-100%

Materials and supplies, net

$ 768

$ 743

3%

Assets held for sale

$ 160

$ 148

8%

Deferred income taxes, net

$ 155

$ 151

3%

Other current assets

$ 346

$ 325

6%

Total current assets

$ 5,633

$ 6,772

-17%

Property and equipment

$ 30,250

$ 28,443

6%

Less accumulated depreciation

$ (7,897)

$ (7,720)

2%

Property and equipment of consolidated variable interest entities, net of accumulated depreciation

$ 984

-100%

Property and equipment, net

$ 22,353

$ 21,707

3%

Goodwill

$ 2,987

$ 2,987

0%

Other assets

$ 924

$ 1,080

-14%

Total assets

$ 31,897

$ 32,546

-2%

Accounts payable

$ 931

$ 1,106

-16%

Accrued income taxes

$ 74

$ 53

40%

Debt due within one year

$ 162

$ 160

1%

Debt of consolidated variable interest entities due within one year

$ 163

-100%

Other current liabilities

$ 1,596

$ 2,072

-23%

Total current liabilities

$ 2,763

$ 3,554

-22%

Long-term debt

$ 10,308

$ 10,379

-1%

Long-term debt of consolidated variable interest entities

$ -

N/A

Deferred income taxes, net

$ 368

$ 374

-2%

Other long-term liabilities

$ 1,281

$ 1,554

-18%

Total long-term liabilities

$ 11,957

$ 12,307

-3%

Total liabilities

$ 14,720

$ 15,861

-7%

From the perspective of the balance sheet, the asset side of the equation had cash and equivalents decreased by 39% from last quarter which made total current assets drop 17% on the whole. After other long-term assets decreased 14%, investors saw total assets decrease by 2% on the whole.

On the liability side of the equation we see an immediate 16% drop in accounts payable followed by a 40% increase in accrued income taxes. Other current liabilities were reduced by 23% bringing down total current liabilities by 22%. Other long-term liabilities decreased by 18% helping total liabilities decrease by 7%.

Conclusion

The company reported earnings which were 51% higher than a year ago on 7% more revenue while the share price was up 2.36% since the last earnings call. These were pretty good results to me and make me want to buy some more shares of the company. The company put together a stellar quarter and great cost reduction. When a company delivers daily revenue gains of 14% year over year and dropping costs by 5.8% that is a recipe for success. When the company provided its mid-April fleet status the backlog was at $26.1 billion and has added $470 million since then to that number. The results were good to me but we'll have to see what investors seemed to think when the market opens tomorrow. This stock may just be at the mercy of the overall market. That being said, I think the stock is inexpensively valued and should be bought. With these results the stock is on my team and in the starting lineup.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Transocean Drilled First Quarter Earnings And Hit A Homerun