The company has recently been in the news with bond refinancing and an offer to buy Transocean Partners (NYSE: RIGP). Developments on the bond refinancing front put some pressure on Transocean shares as the company obtained a 9% interest rate on its bonds.
The offer to buy Transocean Partners was taken mostly neutral by the market. Now the stock market will have to digest Transocean's earnings, which were good given the current challenges of the industry.
Transocean reported earnings of $0.17 per share, way above analysts' estimates. The key to success was the decrease in operating expenses, which were $500 million compared to $665 million in the first quarter.
This decrease happened partly because less rigs were working, but it looks like cost containment efforts also played their role. This decrease mitigated the effect from the drop in revenue, which came in at $918 million compared to $1.11 billion in the first quarter.
Revenue efficiency was a healthy 96.5%. Generally, everything above 95% is satisfactory, although some Transocean peers reached higher figures in the second quarter.
Cost-containment efforts together with operational efficiency are the few factors that are directly under drillers' control in today's market. One cannot expect miracles on this front, as cost cuts have been made throughout the current down cycle and there is a natural limit to this process.
Transocean made progress on this front and I expect that it won't go unnoticed by the market when the stock starts the next trading session.
The company's cash position stood at $2.15 billion at the end of the second quarter while the long-term debt was $7.15 billion. The company's cash position looks solid at first glance, especially given the fact that it grew as a result of the debt refinancing.
However, it's not that easy - Transocean's debt due within one year amounts to $1.06 billion and the company has to deal with three newbuild deliveries.
Deepwater Conqueror is scheduled to be delivered in the fourth quarter of 2016, Deepwater Pontus is expected in the fourth quarter of 2017 and Deepwater Poseidon should start working for Shell (NYSE: RDS.A) at the beginning of 2018.
All those rigs have attractive contracts, so Transocean will surely pay for their delivery. Other seven rigs have been postponed to 2020.
In theory, Transocean Partners could have taken debt and purchased the newbuilds from Transocean, thus easing the latter's liquidity requirements.
In practice, this is impossible as the debt market is almost closed for drillers as highlighted by Transocean's bond offering. Perhaps, when Transocean's management team realized that there was no way to push the newbuilds into Transocean Partners, it decided to acquire the company to avoid spending money on outside shareholders. This is, of course, just a speculation, but it looks like a plausible scenario.
Anyway, Transocean needs more than an earnings beat to establish an upside trend for its shares.
The company's fleet of stacked rigs is big, and a significant number of those rigs will never see work again. Drillers are generally reluctant to test their book numbers for impairments in the current market conditions (except for the thought leader Diamond Offshore Drilling (NYSE: DO), my favorite company in the industry), but make no mistake - there's hardly any discount to book value in current Transocean's valuation as rig valuations have fallen significantly and rigs without contracts are often worth zero.
A solid quarterly report may provide support for Transocean shares for a day or two, but then the company will once again be at the mercy of oil price fluctuations.
The good news for the long side is that the short float in Transocean is already high, opening the possibility for a squeeze in case of an oil rally.
However, the fundamental situation for the industry and for Transocean remains bleak and I expect that the company's shares may continue their slide if positive catalysts do no emerge in the coming few months.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the abovementioned stocks.