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Transocean (RIG) to Post Q3 Earnings: What to Expect?

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Offshore drilling powerhouse Transocean Ltd. (RIG - Free Report) is set to release its third-quarter 2016 results after the closing bell on Wednesday, Nov 2.

What Investors Need to Know

The company’s stock performance has been pretty choppy lately, and it will be up to this coming release to set the trend heading into 2017.

However, the Switzerland-based rig supplier has an excellent industry rank – in the top 16% overall. Transocean also has a ‘B’ for its VGM Score, so fundamentals are pretty strong for this stock.

Adding to the positives, the company has a very good track record when it comes to earnings and has beaten estimates in each of the last twelve quarters, as you can see in the chart below:

TRANSOCEAN LTD Price and EPS Surprise

 

TRANSOCEAN LTD Price and EPS Surprise | TRANSOCEAN LTD Quote

But for a stock exhibiting such great vibes, earnings estimates have been rather stagnant, as the consensus estimate has been unmoved over the past few months. This is something that investors definitely don’t want to see heading into a report.

Therefore, the signals are mixed and it seems as if it could be a rockier report than one might think.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

As is the case with other offshore drillers, Transocean’s revenues/earnings have borne the brunt of the freefall in realized commodity prices over the past 2 years. As oil remains in a bearish territory, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as offshore exploration for new oil and gas projects has almost come to a standstill.

However, Transocean has come up with certain strategy initiatives to overcome the industry-wide slump.

Firstly, with an aggressive cost reduction program, Transocean is looking to shore up its operational performance even in this weak oil and gas pricing environment. As part of this strategy, the company has embarked on a policy to optimize overhead and maintenance expenses.

Secondly, Transocean has zeroed its focus on reducing out-of-service times by carefully planning the frequency of its in-service maintenance and shipyard repairs.

Finally, Transocean has set itself an ambitious target to achieve a very impressive 95% revenue efficiency for 2016. As it is, the company is coming off three consecutive years with revenue efficiency at or above 95% The continuation of this trend will aid operating margin in the to-be-reported quarter. 

Earnings Whispers

Our proven model does not conclusively show that Transocean will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -7.69%. This is because the Most Accurate estimate stands at 12 cents, while the Zacks Consensus Estimate is pegged higher, at 13 cents.

Zacks Rank: Transocean has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. 

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Transocean, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

W&T Offshore Inc. (WTI - Free Report) has an Earnings ESP of +11.63% and a Zacks Rank #1. The company is expected to release earnings results on Nov 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Devon Energy Corp. (DVN - Free Report) has an Earnings ESP of +20.00% and a Zacks Rank #2. The partnership is anticipated to release earnings on Nov 1.

Comstock Resources Inc. (CRK - Free Report) has an Earnings ESP of +3.74% and a Zacks Rank #2. The company is likely to release earnings on Nov 8.

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