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Why Is Transocean (RIG) Down 5.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Transocean (RIG - Free Report) . Shares have lost about 5.5% 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 narrower than expected loss in Q3

Transocean Ltd. posted third-quarter 2019 adjusted loss of 38 cents a share, narrower than the Zacks Consensus Estimated loss of 40 cents. Strong revenues from the Ultra-Deepwater and Harsh Environment floaters together with higher dayrates led to this outperformance. However, the bottom line came in against the year-ago earnings of 6 cents due to higher shipyard costs and lower fleet utilization.

Meanwhile, the offshore drilling powerhouse generated total revenues of $784 million, beating the Zacks Consensus Estimate of $780 million. But the top line declined 3.9% from the prior-year figure of $816 million.

Segmental Revenue Break-Up

Transocean’s Ultra-deepwater floaters contributed about 63.01% to total contract drilling revenues while Harsh Environment floaters and Midwater floaters accounted for the remainder. In the quarter under review, revenues from Ultra-Deepwater and Harsh Environment floaters totalled $494 million and $281 million, respectively.

Revenue efficiency was 97%, marginally lower than the second-quarter level. The figure reflected an increase from the year-ago number of 95%.

Dayrates and Utilization

On an encouraging note, average dayrate in the quarter under review rose to $314,500 from the year-ago level of $295,000 owing to an uptick in activity in the Asia Pacific. The company witnessed year-over-year higher average revenue per day from midwater floaters. Overall fleet utilization was 58% during the quarter, down from the prior-year utilization rate of 65%.

Backlog

Transocean’s backlog, which was recorded at $10.8 billion as of October, reflects a decline of $700 million from the year-ago figure. In the third quarter, the company added approximately $130 million to its backlog.

Costs, Capex & Balance Sheet

Transocean’s costs and expenses rose 17.71% year over year to $804 million. Operating and maintenance costs also increased to $547 million from $447 million a year ago. Transocean spent $121 million on capital expenditure in the third quarter. Cash provided by operating activities totalled $91 million, inducing a negative free cash flow of $30 million. The company had cash and cash equivalents of $1.9 billion on Sep 30, 2019. Long-term debt was $9 billion with a debt-to-capitalization ratio of 43.08% as of the same date.

Guidance

For the fourth quarter, the company expects its adjusted contract drilling revenues to be roughly $825 million. Meanwhile, capital expenses for maintenance are anticipated to be $106 million.

Full-year operating and maintenance costs are predicted to be around $2.1 billion.  Further, the company projects its G&A expense in the range of $175-$185 million.
 

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 -25.93% due to these changes.

VGM Scores

At this time, Transocean has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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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