After the market closed on May 3rd, Transocean (NYSE:RIG) reported financial results for the firm's first quarter of its 2017 fiscal year. In the past, I have invested in the company through call options (never owned the shares) but it's on my radar for attractive long-term prospects. In what follows, I will dig into the drilling rig operator's quarterly data and give my own update about whether it represents a viable opportunity still or if investors should consider looking elsewhere for attractive prospects.
Performance was good
My goal here is not to labor over headline news since it has already spread to a number of places, but I do think a brief overview of Transocean's sales and earnings is warranted. On the top line, the company did quite well, bringing in revenue of $785 million. Although this is far lower than the $1.341 billion management reported a year earlier, it's higher than the roughly $729.38 million analysts anticipated. That said, we do need to make an adjustment here. Non-core revenue during the quarter did come out to $47 million, so we should probably cut that out since it's not part of the business's primary operations. Doing this, we end up with sales of $738 million, which is lower than the core sales last year of $1.111 billion, but is still ahead of analyst estimates.
On the bottom line, the company also did quite well. During the quarter, adjusted earnings per share came out to $0.01 ($0.23 per share in GAAP earnings). Though this really isn't that good for a company with a share price of nearly $11, it was $0.08 higher than the $0.07 loss per share that analysts had forecasted. This was actually driven by a significant reduction in costs. According to management, operating and maintenance costs relative to core sales came out to 46.5% of revenue, down from 59% a year earlier. That said, general and administrative costs did rise from 3.9% of core sales to 5.3%, so that did offset the picture a little bit.
A deeper look at the company's numbers
Now that the headline news, combined with my own commentary, is over, I wanted to dig into some numbers a bit more, numbers that are more pressing. Take, for instance, the issue of cash. By the end of the quarter, excluding $442 million of restricted cash, total cash and cash equivalents came out to $3.09 billion, $41 million above the $3.05 billion that management reported for the end of 2016. This is quite an impressive war chest that can be used for additional debt reduction or, possibly, capital expenditures.
This year, for the final three quarters, capital expenditures should come out to around $341 million. This number will drop to $94 million in 2018 before climbing to $154 million in 2019 and then to a whopping $2.004 billion in 2020. This means that, unless Transocean happens to go meaningfully cash flow negative, the probability of it running out of cash anytime soon is slim. I believe this is especially true after seeing the cash flow picture of the firm during the quarter. You see, despite the huge drop in sales, operating cash flow for the quarter came out to $184 million. On a free cash flow basis, the number was $62 million, but that's not too bad considering how devastated their industry has been. To put this in perspective, operating and free cash flow in the first quarter of 2016 was $631 million and $263 million, respectively.
I did mention the large cash flow figure due in 2020, which may have some investors worried, but something interesting that I spotted was that some of this may vanish. You see, earlier this year, news reports arose that stated that the firm had planned to sell its high-specification jackups (its old ones, plus its 5 newbuilds) to a firm called Borr Drilling. In my own article about the topic, I had actually said that no such deal had taken place and said that it was still in the negotiating phase. This was proven correct in this quarterly release when management stated that they are still in negotiation with Borr.
Based on my math, if they happen to sell all of their high-specification jackups, they will get some sort of cash compensation from the deal, possibly, but most of the benefit will come from the fact that they will no longer be liable for the capex obligations associated with their newbuilds. If the deal were to have been completed at the end of the first quarter of this year, total relief would come out to $1.133 billion, most of which would come in 2020. Given the volatility in this space (I covered some of those details in my article about it), and the fact that high-specification backlog is only $126 million, or 1.2% of total backlog, I believe any such transaction will benefit shareholders down the road. Having said that, management said that if a deal is struck with Borr, they anticipate an impairment of $1.5 billion.
The last meaningful thing that I think investors should be aware of is the fact that, despite its troubles and despite the increase in non-restricted cash, Transocean's management team demonstrated, once again, that they are dedicated toward reducing the company's debt. During the quarter, the firm's debt ended at $8.475 billion. This represents a modest $71 million drop compared to the $8.546 billion seen at the end of last year. I'm not particularly excited by the size of this decrease, but any drop in debt is better than seeing debt rise. Add to this the $3 billion credit facility that they can tap into (they have no borrowings under it and can borrow so long as their covenants aren't breached), and Transocean seems to be preparing for the long haul.
Takeaway
Right now, the picture facing Transocean is actually pretty reasonable. Sales and earnings beat, the latter due at least partially to decreased costs, and cash flow is positive despite seeing a huge drop in revenue. It's likely their sale to Borr will come to fruition, which will only serve to increase their financial flexibility, and so long as they continue to keep their backlog high enough that they can generate positive cash flow (their backlog stands at $10.75 billion today), I believe that it represents a good prospect for long-term investors to consider.
