Transocean Partners - Q4 2015 Preview

| About: Transocean Partners (RIGP)

Summary

No surprises in the fleet status report.

Distributions announced on schedule.

Cash generation will be solid.

Transocean Partners (NYSE:RIGP) will report its Q4-2015 and full-year results on February 24th after the market close. Prior to the release, the company announced its scheduled distribution and provided a fleet status report. There are no surprises on both items and that is welcome news in the current environment of doom and gloom and contract cancellations.

I'd like to provide a short preview of quarterly results, which I expect will show additional increase in cash and working capital position despite paying out scheduled distributions and liquidity being spent on unit buybacks.

Assuming company's rigs had revenue efficiency in the range of 96-97%, I project total revenue for the quarter at $151 million, which is slightly above current consensus estimates. This level of revenue will compare favorably to last quarter's $125 million, when one of the company's drillships had extended downtime due to equipment issues. Additionally, revenue in Q4-2015 would rise 10% y/o/y due to dayrate escalations on two drillships and lack of planned shipyard time incurred in the same quarter 12 months ago. RIGP is the only offshore drilling company expected to report higher revenues compared to the year-ago period.

On the expense side, the company will benefit from continued adjustment of operating costs across the industry. Direct rig operating expenses are expected to be $58 million, which is way below $73 million incurred in the previous quarter due to the aforementioned operational downtime. The rest of the expense items do not fluctuate substantially and are as follows:

G&A - $6 million

Taxes - $ 4 million

Depreciation - $17 million

There are no interest expenses as the company has no debt whatsoever, but there should a small interest income of approximately $1 million.

I expect the P&L statement to look like this:

(in $ millions, except # of units)

Revenue $152
Opex + G&A $64
Depr $17
Taxes $4
Interest income $1
Gross $68
Minority $34.5
Net $33.5
Number of units 68 million
EPU $0.49

Net income attributable to controlling interest is expected to come at $0.49 per unit, which is 4 cents above current consensus. Notice, I have 68 million units outstanding instead of 69 million as I expect that RIGP repurchased approximately 1 million units during the quarter.

Given the fact, that RIGP pays an outsized distribution compared to its current unit price, I will also provide an estimate of generated cash flow in Q4.

  in $ millions
Adj. EBITDA 84
Distributions 50
Extra cash 48
Buyback 10
Beginning cash 140
Ending cash 178

As you can see from my projections, I expect cash balances to improve by $38 million and amount to $178 million after paying the distribution and spending $10 million on unit buybacks. The company would therefore have $2.61 per unit in cash only. Based on the figures above, I expect DCF coverage ratio for Q4 to be approximately 1.4, which attests to the fact that RIGP has significant room for continued increase in balance sheet cash.

RIGP on a standalone basis is obviously the best positioned offshore drilling company due to its pristine balance sheet, however, despite absence of interest expenses, the company still lags some of its competitors on gross and operating margins. The management guided to 15-20% lower opex in 2016 and I'll be interested to hear some more detail on the cost structure during the conference call. I suppose it is too early to expect any potential contractual developments with regards to DD3 semisub, which goes off contract in November of 2016.

Disclosure: I am/we are long RIGP.

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.

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Tagged: , Oil & Gas Drilling & Exploration, Earnings
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