Transocean Ltd (RIG) has witnessed an increase in its revenues and adjusted earnings, and is expected to experience growth going forward.
Nevertheless, we have a neutral stance on the stock due to the uncertainty over the outcomes of litigations related to the Macondo well incident, and the Frade spillover offshore Brazil, where a ban has been imposed on the operations of RIG.
Transocean Ltd. is the largest international provider of offshore contract drilling services for oil and gas wells worldwide. The company owns or has partial ownership interests in 129 mobile offshore drilling units as per the 10Q filling for the second quarter of 2012.
RIG has two business segments, namely contract drilling services and drilling management services. RIG's primary business is contract drilling services, which is involved in contracting the mobile offshore drilling fleet, related equipment and work crews of RIG, primarily on a day rate basis, to drill oil and gas wells.
The drilling management services segment is involved in providing oil and gas drilling management services on a day rate basis, or a completed-project, fixed-price (or turnkey) basis, as well as drilling engineering and drilling project management services through its wholly owned subsidiary, Applied Drilling Technology Inc.
RIG has a market cap of $17.61 billion and is headquartered in Zug, Switzerland.
RIG reported total revenues of $2.55 billion for the second quarter of 2012, showing an increase of 10% as compared to the same period last year. The total revenues are composed of contract drilling revenues, and other revenues (drilling project management services).
The contract drilling revenues of $2.39 billion in the second quarter of 2012 showed an increase of 14% as compared to $2.1 billion in 2Q2011. The contract drilling revenues increased due to (1) higher revenue earning days as a result of shipyard, maintenance, repair, mobilization and equipment certification projects, which were associated with the post-Macondo regulatory and operating environment in 2011, (II) additional revenue earned from the two semisubmersibles, which were a part of the acquisition on Aker Drilling, and (III) rig reactivations in 2012 and 2011.
The other revenues reported for the second quarter of 2012 were $185 million, showing a decrease of 22% as compared to the same period last year. The decrease in other revenues was due to lower revenues earned from drilling management services.
RIG reported adjusted EPS of $0.72 for the second quarter of 2012, showing an increase of 12.5% as compared to the same period last year. The reported EPS beat mean analyst estimates of $0.45 by 60% as per the data compiled by Reuters.
Utilization increased to 66% in the outgoing quarter, as compared to a utilization of 55% in the second quarter of 2011.
Cash Flow from Operations, Capital Expenditures, and Cash and Cash Equivalents
Cash flow from operations for the second quarter of 2012 was $459 million, indicating an increase of 35% as compared to the same period last year. The increase in the cash flow from operations was due to the improvement in operating assets.
Capital expenditures for the second quarter of 2012 were $236 million,a decrease of 19.5% as compared to $293 million recorded in 2Q2011. Cash and cash equivalents at the end of the first half of 2012 were around $4 billion, increasing from $3.4 billion held at the end of the first half on 2011.
The Ultra-Deepwater Floater "Deepwater Horizon" sank after the blowout of the Macondo well caused a fire and an explosion on the rig. At the moment, it is difficult to estimate the complete impact of the Macondo well incident on RIG. However, the company has recognized a liability of $2 billion at the end of the first half on 2012 in connection with the potential liability and loss that could arise due to the well explosion. Of the $2 billion liability recognized by RIG, $750 million was recognized in the second quarter of 2012. The company also recognized an asset of $237 million in lieu of the insurance coverage of RIG, which the company believes is recoverable.
On March 2, 2012, the Plaintiff's Steering Committee (PSC) and BP announced a partial settlement with private party environmental and economic losses and response effort related claims. The court granted a preliminary hearing for the approval of the settlement on November 8, 2012. The court rescheduled the first phase of the trial to determine the liability for January 14, 2013.
Frade Incident Offshore Brazil
In November 2011, there was an oil spill offshore Brazil in the Frade oil field, which is operated by Chevron Corp. The oil spill of 3,600 barrels has been estimated to be 0.5% of the oil spill in the Gulf of Mexico in 2010. CVX and RIG deny any criminal wrong doings and claim immediate response.
RIG has 10 rigs operational in Brazil, of which seven have been leased to Petrobras (PBR). The ban is expected to cost CVX and RIG hundreds of millions of dollars in lost revenues. Prosecutors are seeking $20 billion in fines for damages and criminal charges against 17 executives of CVX and RIG.
The imposed ban will carry a fine of 500 million Reais ($245 million) per day, and is supposed to be imposed 30 days after a formal notification.
Interestingly, even though Chevron Corp owns 52 percent, Petrobras owns 30 percent and Frade Japao, a group consisting of Inpex Corp and Sojitz Corp of Japan, own 18 percent of Frade, lawsuits have only been filed against CVX and RIG.
RIG has shown operational improvement through the increase in cash and cash equivalents revenue, earnings and cash flow from operations generated, and through the decrease in leverage and capital expenditures.
In the wake of the high crude oil prices and increasing demand for hydrocarbons due to an economic recovery, a case for increased exploration and drilling activities in conventional and unconventional onshore and offshore field formations is warranted.
The increased exploration and drilling will be beneficial for the Oil Service Industry, including RIG, since there are potential offshore reserves in Latin America, Africa and the Far East.
RIG suspended its dividend payout, prior to which the company paid out dividends of 79 cent per share. However, its competitors are continuing with their dividend payout policy.
The stock is trading at cheaper EV/EBITDA P/B and P/S multiples of 8.5x, 1.1x and 1.8x as compared to its peers mentioned below, and is offering comparable growth on the basis of PEG. The stock is trading at a P/E multiple of 10.3x, which is at a premium of 20% as compared to its comparable peers mentioned below.
Given the uncertainties with regards to the Macondo well incident, the Frade litigation, and the ban and suspension of dividends, we have a neutral stance on the stock, since there are better investment opportunities available with similar fundamentals and growth, along with lower risks.
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