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Summary

  • The company reported second quarter earnings which beat last year's numbers.
  • However, the company made up for less revenue by major cost reductions, which isn't the greatest way of increasing earnings.
  • Transocean operates in the rough off-shore drilling complex and isn't the only company experiencing pain.

At the beginning of the month, Transocean (NYSE:RIG) reported earnings which beat last year's results by 95% and increased from last quarter by 13%, yet the stock only increased 0.21% on the day after reporting. I'd like to take a quick look at how the earnings increased and find a reason why it may not have skyrocketed. Let's take a quick look at the segment revenues.

Segment Revenues (millions)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Ultra-Deepwater Floaters

-3%

-3%

$1,167

$1,197

$1,201

Deepwater Floaters

-3%

-13%

$252

$259

$289

Harsh Environment Floaters

-11%

-11%

$254

$286

$285

Total High Specification Floaters

-4%

-6%

$1,673

$1,742

$1,775

Midwater Floaters

7%

16%

$441

$411

$381

High Specification Jackups

19%

1%

$160

$135

$158

Contract intangible revenue

0%

-43%

$4

$4

$7

Total contract drilling revenues

-1%

-2%

$2,278

$2,292

$2,321

Client reimbursable revenues

-2%

5%

$43

$44

$41

Integrated services and other

133%

250%

$7

$3

$2

Total other revenues

6%

16%

$50

$47

$43

Total revenues

0%

-2%

$2,328

$2,339

$2,364

So as we can see, there was a 2% drop in total revenues from last year but remained flat from last quarter. Total high specification floaters dropped by 6% thanks in large part to a 13% decrease in deepwater floater revenues and an 11% drop in harsh environment floater revenues. Midwater floaters held their own by increasing 16%, but it wasn't enough to compensate for the drop in the overall total high specification floaters segment. But the company did realize higher day rates during the quarter when compared to last year. So if Transocean didn't make great revenues, then I'm going to have to look at the income statement to see where the benefits were realized.

Income Statement

Q/Q

Y/Y

2Q14

1Q14

4Q13

2Q13

Revenues

0%

-2%

$2,328

$2,339

$2,332

$2,364

Operating and maintenance

-4%

-11%

$1,213

$1,269

$1,532

$1,357

Depreciation

5%

1%

$288

$273

$275

$286

General and administrative

11%

-18%

$63

$57

$75

$77

Total costs and expenses

-2%

-9%

$1,564

$1,599

$1,882

$1,720

Loss on impairment

-100%

-100%

$-

$(65)

$(27)

$(37)

Gain on disposal of assets, net

-133%

-150%

$1

$(3)

$(16)

$(2)

Operating income

14%

26%

$765

$672

$407

$605

Interest income

50%

36%

$15

$10

$13

$11

Interest expense, net of amounts capitalized

-11%

-23%

$(112)

$(126)

$(139)

$(146)

Other, net

-500%

-150%

$8

$(2)

$(7)

$(16)

Total other income

-25%

-41%

$(89)

$(118)

$(133)

$(151)

Income from continuing operations before income tax expense

22%

49%

$676

$554

$274

$454

Income tax expense

-10%

-45%

$72

$80

$46

$132

Income from continuing operations

27%

88%

$604

$474

$228

$322

Income from discontinued operations, net of tax

-13%

-36%

$(7)

$(8)

$7

$(11)

Net income

28%

92%

$597

$466

$235

$311

Net income attributable to non-controlling interest

0%

150%

$10

$10

$2

$4

Net income attributable to controlling interests

29%

91%

$587

$456

$233

$307

Average diluted shares

0%

1%

362

361

361

360

GAAP Income per diluted share

28%

90%

$1.62

$1.26

$0.65

$0.85

Non-GAAP Litigation matters

0%

-33%

$(0.02)

$(0.02)

N/A

$(0.03)

Non-GAAP loss from discontinued operations

13%

95%

$1.60

$1.42

$0.74

$0.82

Just at quick glance, we can see that the company made up for the loss of revenue by having lowered operating and general expenses. The lowered operating and maintenance expenses were thanks in large part to lowered shipyard expenses. The company also had lower taxes due to idle time on rigs in high tax locales. As noted in above, when looking at the segment revenues, day rates actually increased from $382,800 last year to $410,000 this year, however, fleet usage was down to 78% from last year when it was 80%. That explains why segment revenues were down.

This was definitely not a quality beat on earnings I believe, just to the fact that revenues decreased and expenses decreased. Expenses can only decrease to a certain extent, and then you're going to have to find a way to increase your top line. I believe this was the main reason why the stock increased by as much as it did after reporting. I won't doubt that earnings will continue to decrease for the rest of the year as the company still has a lot of rigs to negotiate, which can lead to increased idle time. Analysts at Cowen seem to think that even Transocean's strategic moves of the MLP creation won't be able to assist the company in declining day rates and rig utilizations. This offshore drilling complex is indeed in trouble, and even Transocean's almost 8% dividend yield may not be able to compensate for any drop in share price.

I will admit, this may have been the worst trade I've ever made, but at this point I'm committed to it. I may have jumped in a couple of years too early when I got into the stock last year. The reason I got into the stock last year was because I saw that it had a great balance sheet and was paying a high dividend yield. But what I failed to realize was that the offshore drilling complex was much worse than I anticipated. It's not just Transocean experiencing these issues; it's also Ensco (NYSE:ESV) and Seadrill (NYSE:SDRL) and everyone else in the complex experiencing pain. The decreasing price of oil also doesn't help much. Transocean's rigs may continue to see idle time, and this scares me, because the dividend may have to get cut, or the company is going to have to raise some debt in pay that dividend.

Source: Transocean's 8% Yield Can't Even Help A Tough Offshore Drilling Complex