Offshore drilling giant Transocean Ltd. (RIG) reported bleak second quarter 2011 results, hurt by the decline in utilization rates, lower backlog and higher operating costs.
Earnings per share, excluding expenses associated with the Macondo well incident, tax charges and loss related to impairment of three standard jackups, came in at 65 cents. The figure fell short of the Zacks Consensus Estimate of 77 cents and trailed the year-ago adjusted profit of $1.66.
Total quarterly revenues of $2,334 million missed the Zacks Consensus Estimate by 1.7% and were down 5.8% year over year, mainly due to the reduction in contract drilling sales (due to lower utilization and lower average daily revenue), partially offset by contributions from additional drilling management services activity.
Transocean’s high-spec floaters contributed approximately 61% to total revenue, while mid-water floaters and jackup rigs accounted for 16% and 12% of the total, respectively. The remaining revenue came from other rig activities and integrated services among others.
Operating Statistics
During the quarter, the company’s operating income totaled $391 million, down 58.8% year over year. Operating and maintenance expenses were $1,492 million, 10.8% higher than second quarter 2010, primarily reflecting increased drilling management services activity and a higher level of contract drilling.
Dayrates & Utilization
Average dayrates increased 6.7% from the March quarter to $312,100 on dayrate improvements of 8.7% in floater, 6.4% in mid-water floater, 3.9% in high-spec jackup and 2.3% in standard jackups.
Compared to the second quarter of 2010, dayrates shot up 9.4% (from $285,200 to $312,100), aided by higher dayrates among most types of rigs. However, high-spec jackup dayrates were down 20.4%, while standard jackups decreased 4.6%.
Overall fleet utilization was 55% during the quarter, down from the prior-year quarter level of 64% and flat sequentially.
Backlog
At July 13, 2011, Transocean’s contracted backlog was $23,629 million, down from $24,554 million as of April 14, 2011, reflecting the company’s inability to obtain an adequate number of new rig contracts to replace the existing backlog as it gets consumed over time or if any contract is terminated.
Capital Expenditure & Balance Sheet
Capital expenditures during the quarter totaled $293 million versus $300 million in the prior-year quarter.
As of June 30, 2011, Transocean had cash/cash equivalents of $3,389 million and total debt of approximately $11,081 million (representing debt-to-capitalization ratio at approximately 34.7%).
Outlook
Transocean expects market utilization and dayrates for all classes to remain steady or improve over the next few quarters based on continued favorable commodity prices and an improved global economic outlook, which is also expected to create contracting opportunities for the remainder of 2011 and throughout 2012.
Our Recommendation
With its technologically advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power, Transocean offers an unmatched level of earnings and cash flow visibility.
However, we maintain a long-term Neutral rating on the stock, considering the challenging deepwater as well as jackup environment, slow recovery of global economic conditions and volatile oil and gas prices. The company faces stiff competition from peers such as Noble Corp. (NE) and Nabors Industries Inc. (NBR).
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