Transocean Pumps Up Results On Higher Utilization From Deepwater Demand

| About: Transocean Ltd. (RIG)
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Transocean (NYSE:RIG), the world's largest offshore drilling contractor, released its fourth-quarter earnings on March 1, reporting its first fourth-quarter profit in three years. While the firm's operational performance continued to be strong, the absence of significant write-downs helped nudge the firm's results higher.

Quarterly revenues were around $2.3 billion compared to around $2.13 billion last year, while net income was around $456 million compared to a loss of $6.1 billion (primarily due to impairment charges) in 2011. The results were largely in line with our expectations and aided by stronger drilling in the U.S. Gulf of Mexico as well as by better fleet utilization rates.

Operating Metrics Improve

Strong demand for offshore drilling helped the firm to boost the utilization rate of its fleet. Utilization rates are a measure of how many rigs are working on contracts in comparison to total fleet size. These rates are an important metric given the high capital expenditure that the firm incurs in constructing these rigs. Rates improved to around 78% in 2012, up from around 69% a year earlier.

The performance of the firm's ultra-deepwater floaters and harsh environment floaters was particularly strong with utilization growing by 6% and 12%, respectively. This trend is quite encouraging since these rigs also have the highest day rates within the fleet. Revenues efficiency, a measure of performance of the rig once it is contracted also improved from around 90.5% in 2011 to around 93%.

Looking Ahead: Gulf of Mexico Will Remain Important

1. U.S. Gulf of Mexico will continue to drive growth. The U.S. Gulf of Mexico is Transocean's most important geographic market, accounting for a quarter of the firm's business. Around 14 of 27 of the firm's ultra-deepwater rigs are contracted in this region. These rigs command average dayrates nearing $500,000, significantly higher than the firm's average dayrate of around $370,000. The long-term prospects in this region are also looking better as the U.S. Department of the Interior recently announced plans to auction over 38 million acres of federally owned waters, which would allow oil and gas companies to ramp up their offshore drilling activities in the region.

2. Contract and revenue backlogs. During the last three months, Transocean also added new contracts of around $2 billion, bringing the revenue backlog to around $29 billion. As previously announced, the firm plans to add another 8 new rigs to its fleet by 2017, five of which are ultra-deepwater rigs that will have dayrates of over $500,000.

3. Legal issues being resolved. In January, Transocean reached a $1.4 billion settlement with the U.S. Department of Justice (DoJ), to resolve civil and criminal disputes relating to the 2010 explosion of the Deepwater Horizon rig that the firm was operating for BP (NYSE:BP) in the U.S. Gulf Of Mexico. More recently, Brazilian courts dropped criminal charges against the firm relating to its involvement in an oil spill in the Frade oil field, off the coast of Brazil. These developments should allow the firm to put much of its legal woes behind, and allow it to devote more attention and resources to the growing deepwater drilling business.

We are in the process of updating our model and price estimate for Transocean following the firm's earnings release.

Disclosure: No positions.