Transocean - Time To Turn The Corner Soon?

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About: Transocean Ltd. (RIG), Includes: EQNR, ESV
by: Fun Trading
Summary

Total quarterly revenues of $808 million were down 10.5% year over year on lower day rates but up 7.6% sequentially.

The backlog is clearly the strength of the company, in my opinion, which is the fundamental reason why I consider RIG as number one in this segment.

I recommend to buy RIG on any weakness.

Transocean (RIG) - The Deepwater Invictus.

Gross Tonnage: 68034: Deadweight: 62918 t: Length Overall x Breadth Extreme:238m × 42.04m: Year Built: 2014

Investment Thesis

It is not a secret, the offshore drilling industry is not doing well and drillers are struggling to survive while waiting for an elusive recovery that appeared to slip further away, until now, due to a stubborn low oil price environment.

However, oil is starting to show strength again boosted by OPEC and evidence of stockpiles falling. Brent is over $60 and exuberance is on the street running and screaming. Will it last?

While earning results are not stellar, the offshore market is far from being dead and we see signs of a rig market recovery appearing this year. Rig contracting activity and utilization are on the rise, asset values are increasing, crude oil benchmark prices is growing strong, albeit not sufficient enough to trigger new activity on their own yet.

But, it will! Even if looking at the rearview mirror (earnings) is not particularly telling. Offshore will get its piece of the pie and because they are a "service" they will have to be a little more patient, nothing wrong with that. More, It will be slow because the industry is still extremely oversupplied and consequently is dealing with dismal day rates. Still, one thing for certain is that it is coming.

Transocean is definitely one of the best offshore drillers with a record backlog of over $13.5 billion (10/17) after the acquisition of Songa is offshore is completed. Read my article here.

The conclusion is that offshore drillers could be at the bottom, and it is time to invest in this sector again for the long-term, in my opinion. RIG is the first choice if you decide to get involved with the sector. Here is why.

Transocean - Balance Sheet history.

Transocean 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17
Total Revenues in $ Million 1,884 1,608 1,851 1,341 940 903 974 785 751 808
Net Income in $ Million 342 321 685 235 82 229 223 91 −1,690 −1,417
EBITDA $ Million 756 663 968 646 433 572 604 414 −1,368 −922
Profit margin % (0 if loss) 18.2% 20.0% 37.0% 17.5% 8.7% 25.4% 22.9% 11.6% 0 0
EPS diluted in $/share 0.93 0.88 1.87 0.64 0.22 0.62 0.58 0.23 −4.32 −3.62
Cash from operations in $ Million 1,311 648 960 631 207 440 633 184 319 384
Capital Expenditure [TTM ]in $ Million 1,079 1,654 2,001 2,168 2,431 1,737 1,344 1,098 776 658
Free Cash Flow (Ychart) in $ Million 1,116 −292 295 263 −251 194 361 62 183 256
Cash and short term investments $ Billion 3.769 2.234 2.339 2.574 2.153 2.534 3.052 3.093 2.471 2.717
Long term Debt in $ Billion 10.02 8.75 8.49 8.45 8.22 8.26 8.46 8.40 7.36 7.27
Dividend per share in $ 0.15 0.15 0 0 0 0 0 0 0 0
Shares outstanding (diluted) in Million 363 364 363 364 365 365 373 390 391 391
Backlog 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17
RIG Backlog in $ billion 18.6 16.9 15.5 14.6 13.7 12.2 11.3 10.8 10.2 9.4

Note: Most of the data indicated above come from YCharts

Trends and Charts: Revenues, Earnings Details, Free Cash Flow and Backlog discussion.

1 - Quarterly revenues.
Total quarterly revenues of $808 million were down 10.5% year over year on lower day rates but up 7.6% sequentially. Results beat street expectations which are often the case. Transocean's high-specification floaters contributed about 88.3% to total contract drilling revenues. A bottom is now clearly on the horizon and offshore companies are increasingly more confident. The company said in the conference call:

With our customers continuing to tout breakeven cost at or below $50 a barrel in many deepwater basins around the world, we continue to have a favorable long-term view of the market.

Adding to our optimism, we have seen operators in multiple basins now contracting ultra-deepwater assets for multi-year projects for the first time in over two years. As evidence of this phenomenon, we recently announced a new two-year contract with BHP for the Deepwater Invictus, which includes dayrate adjustments for any changes in the operating location, and three additional one-year options with escalating dayrates, including market rate adjustment in years four and five.

2 - Free cash flow.


Free cash flow is an important hint that should be always evaluated carefully when looking at a long-term investment. Basically, FCF should be sufficient and of course positive, if the business model can be regarded as sound.

RIG has generated $862 million in FCF the past four quarters, which is quite impressive considering the offshore drilling situation.

Henceforward, it must be sufficient enough to pay for the possible dividend, reduce debt and fund an eventual shares buyback. RIG is passing the FCF test.

3- Quarterly Backlog history and discussion:

Jeremy D. Thigpen, the CEO, said in the conference call:

In August, we entered into an agreement to acquire Songa Offshore and its fleet of seven floaters, including four new harsh environment, high-specification Cat-D semisubmersibles. As a reminder, these Cat-D rigs were designed in collaboration with Statoil and are currently contracted to Statoil with a total backlog of approximately $4 billion, which extends into 2024.

Consequently, the total backlog is now $13.5 billion including Songa Offshore. Please, read my preceding article about the recent FSR, it is important.

Songa Offshore Backlog will add an extra $4.1 Billion of firm contract from Statoil (STO).

The future acquisition will increase RIG backlog significantly to $13.5 billion, not including options (an extra $3.7 billion if exercised).

Compared with the third quarter of 2016, day rates fell 3.9% -- from $332,100 to $319,000. However, this average is not really telling because of the impact of the Jack-up segment that has been recently sold to Borr Drilling.

Jeremy Thigpen said:

To be clear, dayrates in the deepwater markets remain under extreme pressure today. However, as activity begins to tick up and asset availability becomes tighter, especially for those higher-specification, more efficient drilling machines, we fully expect to see dayrate improvement over time.

The firm contract backlog is clearly the backbone of the company, in my opinion, which is the fundamental reason why I consider RIG as number one in this segment. Please, take a look at my other article about Ensco (ESV) results. Please read here.

Commentary:

Transocean again beat analysts' estimate this quarter and recorded a modest increase in revenues sequentially. It is not stellar and we have still a long way to recovery that seems painfully slow for long-term shareholders, nonetheless, it is now clearly on the horizon. The caveat lector is that it will take longer than the oil producers' segment because the company is further away down the food chain.

Technical analysis:

RIG is actually shifting from a symmetrical wedge pattern to an ascending wedge pattern now. It is definitely bullish and suggests a resistance going up to now around $11.50.

On the one hand, if oil prices stay strong for the rest of 2017, my opinion is that RIG will have a positive breakout and may test the $14 area as new resistance. On the other hand, if oil prices consolidate back to $50-$55 which is likely, then RIG may go to $9 momentarily, at which point I recommend to accumulate.

Important note: Do not forget to follow me on RIG and other offshore drillers. Thank you for your support, it is appreciated.

Disclosure: I am/we are long RIG, ESV. 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 also trade these stocks frequently, as well.