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Transocean (RIG) Down 15.8% 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 15.8% 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 Posts Adjusted Net Profit in Q3 on High Sales

Transocean reported third-quarter 2018 adjusted earnings of 6 cents per share. The Zacks Consensus Estimate for the same was pegged at a loss of 9 cents. This reflects an earnings surprise of 166.67%. The better-than expected earnings came on the back of higher-than-anticipated revenues from the ultra-deepwater floaters, which is the company’s largest contributor to sales. Precisely, Ultra-Deepwater floater revenues came in at $482 million (accounting for 60% of the total sales), surpassing the Zacks Consensus Estimate of $430 million. Further, the company’s total revenues of $816 million topped the Zacks Consensus Estimate of $777.9 million.

Top line of the company also increased to $816 million from the year-ago figure of $808 million, primarily on higher revenues from Harsh Environment floaters. However, the bottom line declined from the year-ago profit of 16 cents.

Segmental Revenue Break-Up

Transocean’s High-Specification floaters contributed about 91.5% to total contract drilling revenues, while Deepwater floaters, Midwater floaters, High-Specification Jackups accounted for the remainder. In the quarter under review, revenues from Ultra-Deepwater and Harsh Environment floaters totalled $482 million and $265 million, respectively.

Revenue efficiency in the quarter was 95.2%, reflecting a decline from both the prior-quarter and year-ago levels of 97.4% and 97.1%, respectively.

Dayrates and Utilization

On a discouraging note, dayrates fell almost 7.5% (from $319,000 to $295,000)from the year-ago quarter, owing to decline in average daily revenues for Ultra Deepwater floaters and high specification jack ups.

However, overall fleet utilization was 65% during the quarter, up from the utilization rate of 52% and 57% recorded in the year-ago quarter and last reported quarter, respectively.

Backlog

Transocean’s strong backlog, which stands at $11.5 billion as of Oct 22, reflects steady demand from customers. The backlog includes $465 million in new orders awarded during the quarter under review.

Costs

Transocean’s operating and maintenance expenses rose 37.5% to $447 million year over year. Depreciation costs also moved up to $201 million from $197 million in the year-ago quarter. Notably, the company incurred impairment costs of $432 million related to the retirement of two of its drillships.

In the third quarter of 2018, cash flow from operating activities came in at $214 million.

Capital Expenditure & Balance Sheet

Transocean spent $48 million on capital expenditure in the third quarter of 2018. As of Jun 30, 2018, Transocean had cash and cash equivalents of $2,307 million. Long-term debt of the company was $8,955 million, with a debt-to-capitalization ratio of 42.8% as of the same date.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Transocean has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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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