Transocean - All You Have To Know About Q2 2016

| About: Transocean Ltd. (RIG)

Summary

RIG released its 2Q'16 results which were weak due to the actual market, and announced that RIG will merge with RIGP.

RIG announce a new 18-month contract in the North Sea for the SemiSub Sedco 712. It was a very harsh competition involving 16 rigs. Well done RIG!

The main takeaway is that Transocean has experienced recently an increase in activity and more productive conversations, with a recovery in 2018.

RIG is a long-term investment that should be accumulated on any weakness.

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Source: Deepwater.com - SemiSubmersible Transocean Barents.

This article is an update of my preceding article on Transocean, Ltd. (NYSE:RIG) published on Feb. 26, 2016, which was focused on Q4 2015 and full year 2015 results.

RIG's consolidated variable interest entities:

  1. Angola Deepwater Drilling Company, a consolidated Cayman Islands company
  2. Transocean Drilling Services Offshore, a consolidated British Virgin Islands company, variable interest entities for which RIG is the primary beneficiary
  3. Transocean Partners (NYSE:RIGP), of which RIG owns 70.8%

RIGP owns three rigs:

  1. Development Driller III -- 2009 HS UDW
  2. Discoverer Clear Leader -- 2009 HS UDW
  3. Discoverer Inspiration -- 2010 HS UDW

RIG owns 49% of the interest of the three rigs.

On August 1, 2016, I commented about the news indicating that RIG has agreed to acquire all of the outstanding common units of RIGP not already owned by Transocean in a share-for-unit merger transaction. Transocean Partners common unitholders to receive 1.1427 shares of Transocean per Transocean Partners unit in an all equity transaction valued at about $515 million.

We have agreed to acquire the outstanding common units of Transocean Partners in a share-for-unit exchange of 1.1427 Transocean shares for each Transocean Partners unit. The price represents a 15% premium to Partners' closing price as of July 29. As part of this transaction, we expect to issue approximately 22.7 million new Transocean shares. This acquisition provides significant benefits to Transocean in the form of cost savings, simplified governance, and enhanced liquidity. Following the completion of this transaction, the Discoverer Inspiration, Discoverer Clear Leader, and Development Driller III will be 100% owned by Transocean.

2Q'16 Conference call transcript from seeking alpha, click here.

Tab 1 - Q2 2016 results snapshot (6 consecutive quarters).

Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014

Total Revenue

in $ Million

943 1,341 1,851 1,608 1,884 2,043 2,237

Net Income

in $ Million

77 249 611 321 342 (483) (739)

Net Adjusted Income

In $ Million

64 254 615 316 408 398 344

Operating and maintenance expenses

in $ million

500 665 794 880 197 1,084 1,310

Impairment

in $ billion

20 3 903 28 0 936 1.140

Earnings per share - EPS

in $

0.21 0.68 1.66 0.89 0.93 (1.33) (2.04)

Adjusted EPS

in $

0.17 0.69 1.68 0.87 1.11 1.10 0.95

Interest expense, net of amount capitalized

in $ million

95 89 87 109 120 116 123

G & A

in $ Million

42 43 58 45 44 46 62

Depreciation

in $ million

225 217 213 210 249 291 -
Revenue efficiency % 96.5 95.0 95.9 95.0 97.2 95.9 95.3

Backlog

in $ Billion

13.5+ (8/3/16)

14.6 (4/21/16)

15.507 (2/11/16)

16.9 18.6 19.9 21.2

Fleet CapEx

in $ million

458 368 665 940 195 201 n/a

Cash and Cash equivalent

in $ Million

2,153 2,574 2,339 2,234 3,769 2,682 2,635

Total Long-term Debt

Total debt

$ Billion

7.155

8.218

7.253

8.453

7.397

8.490

8.603 8.989 8.896 9.059

Total Long-term Liabilities

$ Billion

8.482

8.590

8.844 9.964 10.413 10.411 10.65

Share Outstanding

in million

365 364 364 364 363.5 363 362
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M. Marc Mey, CFO, said:

During the quarter, we opportunistically repurchased $228 million of debt at a cost of $189 million. This includes the $100 million of debt repurchases discussed during last quarter's conference call that settled after the end of the first quarter. Cash interest savings to maturity of the repurchased debt is approximately $55 million.

Table 2 - Fleet Operating Statistics

Segment

2Q'16

$ million

1Q'16

$ million

4Q'15

$ million

3Q'15

$ million

2Q'15

$ million

1Q'15

$ million

UDW 556 621 813 768 853 932
HE Floaters 100 181 178 211 241 261
DeepWater 51 85 128 135 162 219
MidWater 133 138 222 327 381 429
HS JU 74 82 111 124 136 155
Termination fee 9 4 367 - 23 43
Contract intangible 4 209 4 4 3 4
Client Reimbursable 16 21 28 39 12 -
Total 943 1,341 1,851 1,608 1,884 2,043
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Backlog includes RIGP backlog. The Sedco 712 contract has not been added and may represent an additional $65 million to add to the $13.5+ billion above. See details below.

Ms Terry B. Bonno, Senior Vice President, Marketing said in the conference call:

As a result, our backlog as of July 21 is an industry-leading $13.7 billion. This continues to provide for solid future cash flow generation, with 78% of revenues contracted with the IOCs, 13% contracted with the independents, and 8% contracted with the NOCs. And, further, we do not have contracts in our current backlog that permit cancellation for convenience without some compensation.

Day rate for RIG fleet.

Dayrate

2016 Estimated

$K/d

2Q'16

$k/d

1Q'16

$k/d

4Q'15

$k/d

3Q'15

$K/d

2Q'15

$K/d

4Q'14

$k/d

UDW 350-380 503.0 490.3 512.6 475.8 531.4 544.8
HE 375-400 343.5 548.6 702.2 493.4 513.3 484.0
Deepwater 280-320 238.6 310.0 349.7 368.6 364.0 391.1
Midwater 280-300 304.6 361.4 380.8 350.0 338.8 338.5
HS JU 90-120 137.9 150.2 172.1 172.7 172.1 170.2
Total 353.7 395.4 422.8 385.3 397.6 406.4
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Full-Year 2016 Guidance Summary (2015 and update CC 2Q that changed a little the previous guidance).

2016 guidance
Fleet average efficiency 95%
Other revenues 265-275
Recharge and other misc. Revenues $ Million 60-70
OPEX $ Billion 2
Depreciation $ Million 900
G&A $ Million 150
Net Interest Expenses $ Million 360-370
Annual effective Tax rate 25-27%
CAPEX $ million remaining H2 2016 $600
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Commentary:

Transocean released its 2Q'16 results on August 4, 2016. It was another decent quarter, which mirrored the increasing difficulties encountered by the company struggling in this negative market environment, that has continued unabated since the start of 2016.

I have always considered Transocean as the true bellwether of the offshore drilling sector, and it is very important to listen to the conference call to acquire the right idea concerning the actual market situation.

The real balance sheet numbers are above, and I will not repeat them. I will only indicate a basic graph related to the total revenues per Quarter to show the trend and how the market is affecting Transocean. I recognize that most of the readers here have a very good understanding of the financial situation and I will not repeat the obvious, it would be a waste of time.

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The second graph demonstrates the importance of the UltraDeepwater (60.8%) and its contribution to RIG revenues (based on $914 million excluding others revenues, such as Client Reimbursable:

Let's not kid ourselves here, it is not by looking at the rear mirror (balance sheet) that we will make a logical trading/investing strategy for the next quarters and years. We need to examine the actual state of the market paradigm.

Offshore drillers are selling a service to O&G operators who are investing based on the prices of oil (WTI, brent and others). So, I paid a particular attention of what Ms Terry Bono said in the conference call and will comment particularly on this issue now. Why, Ms Bono and not M. Thigpen? It is simply because she talked mainly about the actual market and its outlook.

The company has been very busy on the marketing front and since January RIG announced 13 floater contracts, which is very telling considering the market paradigm. For the ones who want to look deeper, I commented in details here. (fleet status on July 21, 2016.)

One good news announced at the conference call unveiled by Ms Bono, is the new 18-month contract:

We are also happy to announce another UK program with an unnamed customer that will commence early 2017 for up to 18 months utilizing the Sedco 712. The backlog is not included in the reported number above. This was a very competitive tender with 16 rigs offered, demonstrating the availability in this market and our ability to successfully execute against our competition.

According to what has been awarded recently in the North Sea (Paragon Offshore MSS1 for 2-month @$110k/d) I believe the contract will have a day rate at around $120K/d (down from actually $409k/d) which is a backlog of approximately $65 million.

The essential topic is that Transocean has experienced recently an increase in activity and more productive conversations compared to the few previous quarters.

Furthermore, and despite what has been stated about the deepwater drilling sector versus the US shale, RIG indicated that its customers remain firmly committed to their deepwater assets as they view them as a necessary source of future reserve, whereas,

The pace with which operators will ultimately add rigs to replace both reserves and production is not clear, but our customers realize that the reduction in offshore drilling is not sustainable.

Ms Bono concluded:

Longer-term continued price recovery with a stable outlook bodes very well for significant activity improvements in 2018. As the floater market stands today, marketed utilization is down to 73% with 59 rigs idle and 56 cold stacked. Year to date, 33 floater fixtures have been announced, mostly in Asia, India, and the UK/Norway, with the majority being short term work except for India. As the market challenges persist, we will see more stacking and retirements of the floater fleet. Under these conditions, we expect reactivations will become economically challenging and lengthy, meaning the real marketed supply, rigs ready to work, could be below 200 floaters. And, as we know, the demand over the past five years well exceeded 200 rigs.

I see this comment as very encouraging for the entire industry, and more specifically to the deepwater segment, which is the most significant part of Transocean's business. It is clear that we have hit the bottom and we may start a small recovery culminating in 2018. Oil prices are still predominant.

The lingering question will be the day rates and how fast they will increase again from here? It is a problem and I have no answer other than it will take longer than the actual recovery in tendering activity.

Conclusion:

The 2Q'16 is an important milestone and confirms my belief that we are bottoming as we talk. As a long shareholder, I have been mostly trading RIG the past two years because it was obvious that the stock was diving quickly in correlation with the petroleum prices.
However, and I have said it last quarter, the tide has changed and I am more a long time shareholder now and will add to my position on any weakness.

Important note: Do not forget to be one of my followers on RIG and the offshore drilling sector in general. Thank you.

Disclosure: I am/we are long RIG.

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.