On Aug 21, 2014, we issued an updated research report on offshore drilling giant, Transocean Ltd. (RIG). The company – which recently reported strong second-quarter earnings – expects 2014 operating expenses to be significantly lower than the prior two years. However, we expect Transocean shares to remain soft until it fully works its way through claims related to the BP plc (BP) oil spill. This balanced view is reflected in Transocean’s current Zacks Rank #3 (Hold) – implying that it will perform in line with the broader U.S. equity market over the next one to three months.
Switzerland-based Transocean has delivered positive earnings surprises in the last five quarters with an average surprise of 24.3%. During the second quarter, the company’s earnings per share (excluding special items) came in at $1.61, which surpassed the Zacks Consensus Estimate of $1.09 and the year-ago adjusted profit of $1.08, owing to higher dayrates and reduced operating and maintenance costs.
Transocean expects full-year operating and maintenance cost in the band of $5.1−$5.3 billion, lower than $5.8 billion and $6.1 billion reported in 2013 and 2012, respectively. We believe that the reduced operating cost will drive the bottom line to a great extent.
Moreover, Transocean – which has technologically advanced and versatile drilling fleet – has a strong backlog, which now stands at roughly $25 billion. The backlog not only reflects steady demand from its customers but also offers an unmatched level of earnings and cash flow visibility. This enables Transocean to navigate the current uncertain environment better than many of its peers.
However, although Transocean has come a long way since the 2010 Deepwater Horizon rig disaster and settled a host of civil/criminal claims associated with the incident, it can still be held responsible for certain punitive damages and might have to pay compensations.
Additionally, the introduction of new and more stringent regulations due to the oil spill has made deepwater drilling activity prohibitively expensive. This could reduce the demand for deepwater drilling and hurt Transocean’s bottom line.
Key Picks in the Industry
Currently, we prefer to remain at the periphery regarding Transocean. Better-ranked players in the oil and gas drilling industry include Patterson-UTI Energy Inc. (PTEN) and Pioneer Energy Services Corp. (PES). Patterson-UTI and Pioneer Energy sport a Zacks Rank #1 (Strong Buy).
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