After the market closed on August 3rd, the management team at Transocean (NYSE:RIG) released financial results for the second quarter of the business's 2016 fiscal year. Heading into the release, I published an article detailing not only what analysts expected but also what I believed investors should keep a watchful eye for. To follow up on that, I decided that it would be a wise idea to revisit my prior thoughts and figure out what recent developments mean for investors in the enterprise.
Strong earnings are key
According to management, the financial picture for Transocean has been pretty good. During the quarter, contract drilling sales came in at $918 million, but when you add in the $25 million in "other" revenue, total revenue for the period rises to $943 million. Although this is far lower than the $1.78 billion Transocean reported the same period a year earlier, it does beat out analysts' expectations, which called for sales of $922.82 million for the quarter.
On the bottom line, performance was even better. Based on the data provided, Transocean's adjusted earnings for the quarter came out to $0.17 per share (GAAP earnings were higher at $0.21). This represents a major fall from the $1.11 per share (GAAP earnings of $0.93) seen the same quarter last year, and may give investors cause for concern, but when you consider that analysts were calling for earnings of $0.00 per share, this is a huge accomplishment.
How did Transocean stack up to my expectations?
Looking purely at sales and profits, the financial performance of Transocean was good, but in my last article on the company I pointed out a couple of things I believe investors should keep an eye on. First and foremost was the firm's cost structure. After seeing margins contract in the first quarter compared to a year earlier, I said that investors should look to see if management can either lower costs or at least keep them flat year-over-year.
Truth be told, the results were mixed but tilted slightly to the negative. During the quarter, the company's operating and maintenance costs as a percent of contract drilling revenue stood at 54.5%. This is actually a nice improvement over the second quarter of 2015 when, after adjusting for proceeds associated with the Macondo well incident, last year's costs averaged 55.4% of sales so this looks like a win. However, general and administrative costs grew from 2.5% of those sales last year to 4.6% this year, bringing the total of these cost categories to 59.1% compared to last year's 57.9%.
The other item I suggested investors keep an eye on related to Transocean's debt. Between the first quarter of this year and the end of the second quarter, total debt (long-term plus short-term) fell from $8.45 billion to $8.22 billion. This is actually quite positive, but this does not factor in the effects of its recent debt issuance and the company's tender offer for three different classes of debt.
You see, just recently management decided to issue $1.25 billion in debt (they only received $1.21 billion after discounts and fees) at a rate of 9% that's due in 2023. Management then earmarked $1 billion of this for buying back other debt that ranges between 2020 and 2022. Based on the results of the tender offer, debt with a par value of $981 million was acquired in exchange for $876 million in cash. If we were to factor in these changes to the equation, total debt is now flat at $8.45 billion compared to the first quarter of this year.
It should be mentioned though, that because of the discount the 2020-2022 debt was bought back at, cash has actually increased by $334 million compared to the end of the second quarter. When performing the math here, this implies a net reduction in debt of $105 million (net meaning that we take debt and then subtract cash from it). This should bring cash and cash equivalents (excluding restricted cash) up to nearly $2.26 billion, a decrease compared to the $2.57 billion seen in the first quarter.
The last item I'd like to stress here relates to backlog, which will quite literally decide if Transocean lives or dies. On April 21st of this year, total backlog for the business stood at $14.6 billion, which is very good for a company whose sales in the first two quarters of this year came out to $2.28 billion. However, as of July 21st, the most recent that data is confirmed for by management, backlog has dropped to $13.7 billion. During the tough times that Transocean and its peers are facing, some drop is certainly expected here and I'm comfortable with where the business's backlog is at the moment, but this is an area that investors should continue to watch. Absent an unforeseen situation like fraud, backlog is almost certainly the first place that trouble will begin to show up in should Transocean's ability to survive fall into doubt.
After looking over all of this information, I must say that I'm very happy with the firm's financial results on the top and bottom lines for the quarter. I'm also glad that debt isn't rising but is actually slightly lower on a net basis, and I also enjoy the cost-cutting when it comes to operating and maintenance costs. I am a bit perturbed regarding Transocean's general and administrative costs and I'd like the cash situation of the company to be better off than it currently is, but with a hefty backlog at the moment and an untapped credit facility for $3 billion in addition to its other cash on hand, I'm not worried with the way the company looks right now.
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.
Additional disclosure: I own 2017 calls, not the shares