Offshore drilling giant Transocean Ltd. ( RIG - Analyst Report ) reported strong second quarter 2012 results, buoyed by an improvement in utilization levels even as average daily revenue slipped.

Earnings per share, excluding special items, came in at 72 cents; significantly ahead of the Zacks Consensus Estimate of 44 cents and the year-ago adjusted profit of 50 cents.

Revenue

Total quarterly revenues of $2,575.0 million were up 10.3% year over year and also surpassed the Zacks Consensus Estimate by 3.7%, mainly attributable to better efficiency on high-spec floaters and a dip in the number of shipyard days.

Transocean’s high-spec floaters contributed approximately 67% to total revenue, while mid-water floaters and jack-up rigs accounted for 13% and 12% of the total, respectively. The remaining revenue came from other rig activities, integrated services and others.

Operating Statistics

During the quarter, the company incurred operating loss of $163.0 million, compared to operating income of $355.0 million in the year-ago period. This can be attributed to a steep jump in operating and maintenance expenses, which increased 54.2% to $2,357.0 million primarily on the back of contingencies for the Macondo well incident. Rig maintenance activities also swelled costs.

Dayrates & Utilization

Compared to the second quarter of 2011, dayrates fell 2.1% (from $312,100 to $305,400), unfavorably impacted by declines in mid-water floater and standard jack-up dayrates, offset to some extent by improved dayrates among high-spec floaters and jack-ups.

Overall fleet utilization was 66% during the quarter, up from the year-ago utilization rate of 55%.

Capital Expenditure & Balance Sheet

Capital expenditures during the quarter totaled $236 million, of which the lion’s share went to Transocean’s contract drilling services segment. As of June 30, 2012, Transocean had cash/cash equivalents of $3,964.0 million and long-term debt of approximately $9,862.0 million (representing a debt-to-capitalization ratio of approximately 38.7%).

Rating & Recommendation

Even though Transocean has a Zacks #2 Rank (Buy rating) in the short run, we are Neutral on the shares in the longer term.

Switzerland-based Transocean is the world’s largest offshore drilling contractor and the leading provider of drilling management services worldwide.

We acknowledge that operational issues – such as fluctuating dayrates and high costs – have held the company back. We also remain worried about the offshore driller’s high debt and its decision to halt its dividend.

However, armed with its technologically-advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power, the company offers an unmatched level of earnings and cash flow visibility. A recent court ruling, which absolves Transocean of some of the cleanup cost related to the Deepwater Horizon incident, has also eased the overhang on the stock. Nevertheless, we expect Transocean shares to remain soft until it fully works its way through claims related to the BP plc ( BP - Analyst Report ) oil spill.

As such, we see the stock performing in line with the broader market.