Transocean - Q1 2016 Earnings Preview

| About: Transocean Ltd. (RIG)
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Hefty beats to both top and bottom lines are in the works.

The top line will benefit from one-time cancellation fees.

Expect the market to shrug off positive results as backward-looking.

Transocean (NYSE:RIG) will report its Q1 2016 quarterly results on May 4, 2016, after the market close. As usual, I will present a condensed preview of what to expect. I'm ranked as the top analyst among 255 other contributors for Transocean on Estimize, which means my estimates were closest to the mark over the past four quarters.

This particular quarter will mark sort of a peak and the end of strong earnings reports for the foreseeable future. Starting with Q2, RIG will report earnings that are slightly above or below breakeven, but nothing close to $1-$1.50 of earnings per quarter it reported over the past 8 to 10 quarters.

The table below shows my expectations and I will provide more detail on the revenue and cost side.

in $ millions
except EPS
Revenue 1.312
Opex + G&A 0.689
Depr 0.217
Interest 0.088
Tax 0.051
Minority 0.009
Net income 0.258
EPS 0.71

Revenues in Q1 will be aided by approximately $200 million of early cancellation fees. I anticipate most analysts to exclude this amount both from the top line and bottom line when issuing their client notes after the earnings report is out. Thus, there will be two camps: one camp reporting RIG's numbers and the other camp reporting numbers adjusted for early cancellation fees.

My revenue estimate of $1.31 billion includes those fees and assumes that revenue efficiency was 95% during the quarter.

Costs should be broken down into several categories. Transocean has a large number of rigs that are cold stacked and a fair amount that are warm stacked. My breakdown for different types of rigs is as follows:

in $ millions
UDW 310
DW 55
Onshore Support 85
JU 42
HE 96
MW 59

I believe the company will report a substantial drop in UDW costs due to lower pre-stacking costs during the quarter and lower daily costs on previously stacked drillships. I also expect a substantial reduction in onshore support costs. Other lines will look very similar to Q4 2015 results. My estimate of total operating costs will be $646 million in Q1. This will be the last quarter that operating costs will be above $600 million over the next 12-18 months.

G&A expenses should trend below $45 million as Transocean adjusts its employee count to lower operating levels. Interest expenses will benefit from lower debt, but capitalized interest on Deepwater Thalassa will have to be recognized on the income statement since the drillship has been in operation since February 2016.

In all, I estimate total expenses inclusive of minority interest to be $1.05 billion and RIG's EPS to come at $0.71 per share. Consensus estimates are currently around $0.30 per share, but I suppose those estimates do not include incremental earnings from lump-sum cancellation fees.

On the cash flow front, RIG should add approximately $600 million in operating cash flow when accounting for $100 million of working capital release. It is possible that the company was active in buying back its distressed debt in the January-February period, and as such it would be difficult to forecast the amount of cash RIG had on its balance sheet at the end of Q1. Moreover, the timing of final installments for three remaining Shell-contracted newbuild drillships will determine the actual amount of cash at the end of respective reporting periods.

I expect the market to once again shrug off RIG's earnings and revenue beat. Along with the earnings report, the company will release a new schedule of capex for 2017-2019. Based on the latest delays, it is possible that 2017-2018 will see very minimal capex. That would help RIG to orderly repay its debt due over the next 24 months using operating cash flow.

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.