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Transocean (RIG) Down 14.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Transocean (RIG - Free Report) . Shares have lost about 14.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Transocean due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Transocean Reports Wider-Than-Expected Q1 Loss

Transocean posted adjusted loss of 30 cents a share in the first quarter of 2019, a penny wider than the Zacks Consensus Estimate. Lower-than-anticipated revenues from Harsh Environment floaters along with increasing costs led to the underperformance. Precisely, revenues from harsh environment floaters came in at $258 million, lagging the consensus estimate of $289 million.

However, the bottom line improved from the year-ago period’s loss of 48 cents on robust contribution from Ultra-Deepwater floaters. The group contributed $476 million to Transocean’s revenues, ahead of the Zacks Consensus Estimate of $463 million.  Higher dayrates and utilization helped too. 

The offshore drilling powerhouse generated total revenues of $754 million, in line with the Zacks Consensus Estimate but increased 13.6% from the prior-year figure of $664 million.

Segmental Revenue Break-Up

Transocean’s High-Specification floaters contributed about 97% to total contract drilling revenues, while Deepwater and Midwater floaters accounted for the remainder. In the quarter under review, revenues from Ultra-Deepwater and Harsh Environment floaters totaled $476 million (above the Zacks Consensus Estimate of $463 million) and $258 million (lower than our estimate of $289 million), respectively.

Revenue efficiency in the quarter was 98%, reflecting an increase from both the fourth quarter and year-ago levels of 96% and 92%, respectively.

Dayrates and Utilization

On an encouraging note, average dayrate in the quarter under review rose to $306,500 from the year-ago level of $287,600, owing to the uptick in activity in the Asia Pacific and strength in harsh environment markets of Norway and Canada. Overall fleet utilization was 56% during the quarter, up from the utilization rate of 52% in the year-ago period.

Backlog

Transocean’s strong backlog, which was recorded at $12.1 billion as of Apr 17, reflects steady demand from customers. While it declined $400 million from the year-ago period, it’s still the highest in the industry. During the first quarter, the company added more than $370 million to its backlog, chiefly attributable two new award from Brazilian energy major Petrobras

Costs

Transocean’s operating and maintenance expenses rose 29.8% year over year to $508 million. Depreciation costs also increased to $217 million from $202 million in the year-ago quarter. With costs rising, the company reported negative cash flow from operating activities to the tune of $51 million.

Capital Expenditure & Balance Sheet

Transocean spent $52 million on capital expenditure in the first quarter of 2019. It had cash and cash equivalents of $1.9 billion as of Mar 31, 2019. Long-term debt of the company was $9.1 billion, with a debt-to-capitalization ratio of 41.2% as of the same date.

Guidance

For the second quarter, the company guided toward operating and maintenance expenses of $545 million. Capital spending is likely to be around $123 million (including $70 million on under-construction newbuilds). Finally, Transocean sees revenue efficiency at 95% in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -47.48% due to these changes.

VGM Scores

At this time, Transocean has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Transocean has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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