Transocean Earnings - The Offshore Recovery Is Starting To Take Shape
Summary
- Transocean reported its first-quarter earnings that were broadly in line with the analysts' estimates.
- GAAP EPS totaled -$0.16, which was a $0.05 estimate beat, whilst the revenue figure was $653M, a miss of $0.71M.
- The management is highly optimistic about the company's performance, whereas the heavy debt load Transocean used to suffer from is much lower now.
- The vaccination campaigns in many countries are running at full speed and there is an economic recovery.
- Other offshore drillers have gone bankrupt and many of their rigs have been scrapped. The Green agenda will most probably be a limit to rising oil production. The outlook for both the oil prices and Transocean is much brighter now.
The earnings release
The sales revenues were slightly below the previous quarter but the operating and maintenance expenses were lower as well.
- time range: 4Q2020
- Total contract drilling revenues: $690 million
- Revenue Efficiency: 97.2%
- Operating and maintenance expenses: $465 million
- time range: 1Q2021
- Total contract drilling revenues: $653 million
- Revenue Efficiency: 97.4%
- Operating and maintenance expenses: $435 million
In my view, one of the brightest spots of the first quarter's earnings is the adjusted EBITDA of $245 million figure, a $35 million improvement compared to 4Q2020. I agree with the management that this shows sound cost control. Fleetwide revenue efficiency totaled 97.4%, which was quite in line with the company's usually excellent backlog conversion. Even more important, in my opinion, was the fact there was positive cash flow from operating activities, which totaled $96 million.
As concerns the cash cushion, Transocean ended the fourth quarter with total liquidity of about $2.7 billion, including unrestricted cash and cash equivalents of approximately $1.1 billion, roughly $300 million of restricted cash for debt service, and $1.3 billion from the company's undrawn revolving credit facility. It is quite a sound cash cushion, whereas the management has shown creativity, whilst retiring some debt. So, I truly believe Transocean will explore all the possible options to reduce the debt load and raise the cash levels.
The backlog totaled $7.4 billion, a fall from $7.8 billion. The falling backlog problem has been often pointed out here on Seeking Alpha. However, if we dig a bit deeper, we will see that new contracts were awarded in the past quarter and none were canceled.
For example, in the Gulf of Mexico, the Deepwater Asgard was awarded a three-well fixture with Beacon Offshore Energy. Two of these wells were priced at $240,000, whilst the third well was priced at $280,000 a day. This led to a $30 million addition in the company's backlog. Transocean's CEO Jeremy Thigpen also pointed out tightening market conditions in the Gulf of Mexico.
In Trinidad the DD3 is going to start her next contract with BHP in June and, including options, the DD3 could remain on contract with BHP in Trinidad through September.
In Brazil, the Petrobras 10000 is scheduled to end her contract with Petrobras in September. However, Transocean's management was said to be "in the middle of discussions" with Petrobras about a long-term extension.
As concerns Norway, the Transocean Norge was awarded another one-well extension by Equinor at a day rate of $297,000 plus bonus. The rig is expected to be on contract through June. But it is actively being offered multiple opportunities in the Norwegian market. The Transocean Barents is starting her work with MOL Norge soon, which is expected to run to the fourth quarter and probably even beyond.
As the management noted on the fourth-quarter call, in West Africa the Deepwater Skyros was awarded Total's Rig of The Year. The company is discussing the possibility with the customer of a six-well option which is expected to last for more than a year for the rig.
If we look at the Asia-Pacific region, very recently the Deepwater Nautilus began her 90-day contract with POSCO. This means the Deepwater Nautilus will work at least through July but the management is actively looking for new opportunities for the Nautilus in the Asia-Pacific region.
Overall, the management expects the offshore recovery to take place. Jeremy Thigpen sees the market for offshore drilling rigs getting tight. It looks like the company is going to announce more contract awards pretty soon.
It is often mentioned by many analysts that RIG's competitors are emerging from bankruptcy proceedings. These companies, they argue, will be very strong rivals for Transocean since they will have few or no debts. So, they think the day rates will stay depressed since the market will not get tighter. But it is often forgotten that they emerge with little cash, whereas the offshore drilling business requires heavy capital expenditures. What is more, a majority of these newly emerged companies have very poor fleets with many of their rigs cold-stacked. As the management has mentioned, it is quite costly to activate cold-stacked rigs. That is why I would rather agree with the management who argue the market is getting tighter.
Transocean's activities and the macroeconomic outlook
Some analysts actually worry about the effects the Green agenda might have on Transocean's activities in the Gulf of Mexico. But, in my view, there is hardly any reason to worry about this.
First, Transocean does not rely too heavily on the Gulf of Mexico. What is more, there are a lot of growth opportunities not-to-be-missed in developing countries. Of particular interest are Guyana and Brazil where the environmental regulations are much more lenient, whereas the governments do whatever they can to support their offshore oil drillers.
Secondly, the Green agenda does not only combat offshore oil. It also targets other oil sources. If we are to talk about the US, much of the pre-pandemic oil production jump was due to shale, which is, arguably, more dangerous for the environment than offshore oil. This does not mean all American shale will disappear overnight but it does mean the conditions are getting less and less favorable.
For example, quite recently California decided to initiate a regulatory action to stop the issuance of new fracking permits by January 2024. It might not mean much in terms of oil production since not much of the state's oil is coming from fracking. However, it is quite a precedent and more states would probably follow California's example. This fits well with the Green agenda and the fact that the US joined the Paris Climate Accord. President Biden also pledged to make a 50% reduction in greenhouse emissions by 2030 compared to 2005. So, this suggests seriously limiting any new oil and gas production.
But the alternative green sources are not ready to fully replace the traditional fossil fuels. This winter, in my opinion, made it clear. We all know there were extreme weather conditions in Texas with extremely low temperatures and blackouts. Neither the solar panels nor the wind turbines were able to solve the electricity problems. However, not only did Texans suffer from the consequences of this unusually cold winter. Abnormally low temperatures were observed this winter in South Europe, Japan, and China. It is quite strange since these regions are associated with mild winters. If we continue to experience similar temperatures in the future, the high oil demand and especially gas will be here to stay until the alternative technologies get more advanced.
It is often assumed Transocean's backlog and drilling revenues only depend on the oil prices. This is not entirely so. According to the company description found on Reuters' website:
Transocean Ltd. is an international provider of offshore contract drilling services for oil and gas wells. The Company's primary business is to contract its drilling rigs, related equipment and work crews on a dayrate basis to drill oil and gas wells.
As you can see Transocean also relies on the demand for gas, which is a fossil fuel well-suited for heating homes. So, if the demand for gas stays high and its production goes down, Transocean will be here to gain.
Moreover, the oil prices are also stabilizing with the massive vaccination campaigns and the gradual post-pandemic reopening all over the world.
Conclusion
Transocean is a true leader in the offshore drilling industry. Transocean's management seems to be competent and willing to serve their stockholders. It was clearly evidenced by the debt exchange offer they did last year.
The market for drilling rigs is getting tighter, whilst the oil prices are getting higher. The macroeconomic outlook is improving due to the gradual post-pandemic reopenings and the favorable monetary conditions. The Green agenda will be quite a hurdle for raising oil production.
PDF