Transocean Misses Bottom Line

Offshore drilling giant Transocean Ltd. (RIG - Analyst Report) reported weak fourth quarter and full-year 2011 results, hurt by the lingering effects of Gulf of Mexico tragedy, steeper operating costs and high interest expense.

Earnings per share, excluding expenses associated with the Macondo well incident, Aker Drilling acquisition costs, gains from asset sales and other minor items, came in at 19 cents, a penny short of the Zacks Consensus Estimate and significantly behind the year-ago adjusted profit of 76 cents.

For the full year, earnings per share, excluding one-time costs, were $1.45, down 1.4% from our projection of $1.47 per share. Comparing year over year, the reported results declined heavily from $6.00 earned in the prior year.

Revenue

Total quarterly revenues of $2,422.0 million were above the Zacks Consensus Estimate by 4.0%. The result also improved 13.9% year over year, mainly attributable to the addition of new rigs along with higher utilization.

Transocean generated revenues of $9,142 million in fiscal 2011, compared with $9,466 million in 2010 but surpassed our projection of $9,069 million.

During the quarter, Transocean’s high-spec floaters contributed approximately 66% to the total revenue, while mid-water floaters and jackup rigs accounted for 14% and 12%, respectively. The remaining revenue came from other rig activities, integrated services and others.

Operating Statistics

Quarterly operating and maintenance expenses were $2,565.0 million, 91.6% higher than the fourth quarter of 2010, primarily reflecting estimated loss contingencies related to the Macondo well accident and unscheduled costs from contract termination.

Dayrates & Utilization

Quarterly average dayrates increased 1.8% from the September quarter to $295,400, as high-spec floaters dayrates improved 1.6%, partially offset by a 4.6% and 7.0% respective decline in mid-water floater and standard jackup dayrates.

Compared to the fourth quarter of 2010, dayrates rose 6.7% from $276,900, favorably impacted by a 17.4% rise in high-spec floater dayrates, offset to some extent by, respectively, 13.1% and 15.6% lower dayrates among high-spec jackups and standard jackups.

Overall fleet utilization was 61% during the quarter, up from the prior quarter and year –ago level of 58%.

Capital Expenditure & Balance Sheet

Capital expenditures during the quarter totaled $350 million (versus $300 million in the prior-year quarter) netting $1,020 million for the full year (as against $1,391 million in 2010).

As of December 31, 2011, Transocean had cash/cash equivalents of $4,017.0 million and long-term debt of approximately $10,756.0 million (representing a debt-to-capitalization ratio at approximately 40.7%).

Guidance

For 2012, Transocean expects operating and maintenance costs to range between $6,150 million and $6,350 million. The company also aims to invest about $1,200 million to $1,300 million on capital programs.

Our Recommendation

Transocean, which competes with Diamond Offshore (DO - Analyst Report) and Noble Corp (NE - Analyst Report), currently retains a Zacks #3 Rank, translating into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

With its technologically advanced and versatile offshore drilling fleet, strong backlog, considerable pricing power and improved utilization rates, the company offers an unmatched level of earnings and cash flow visibility.

However, we expect the Deepwater Horizon incident to continue to create some overhang on Transocean shares in the coming quarters. Moreover, the high debt level, increased operating expenses and international business risks adds to our negative sentiment.