Transocean Ltd. (RIG) is a Switzerland-based offshore drilling contractor. The company is the largest offshore contract drilling services provider in the world, with operations in oil and gas exploration and development areas. Transocean also has an offshore drilling fleet that includes ultra-deepwater, harsh environment, deepwater, and midwater rigs that it owns and operates. It caters to integrated oil companies, as well as government-owned or controlled oil companies and other independent oil companies.
On May 3, Transocean reported earnings for the fiscal first quarter of 2021, which fell short of analyst estimates. The company reported a loss of 19 cents per share, wider than the analysts’ estimate of a loss of 16 cents per share. Despite the company’s weak performance, its stock rallied following the earnings release since it was able to reduce its debt-to-capitalization ratio to 38.5% in the first quarter. However, the stock is currently under tremendous pressure, owing to reports of a further delay in the Deepwater Titan contract. Investors should take advantage of this opportunity to scale into the stock and consider adding to their portfolio.
First-quarter earnings recap
The company reported revenue of $653 million, down 14% year over year. Transocean’s Ultra-deepwater floaters generated $436 million in total contract drilling revenue, with Harsh Environment floaters accounting for the remaining $217 million. Harsh Environment floaters contributed to the company’s strong year-over-year average daily revenue. In the first quarter, average day rates increased to $373,700, up 18% year over year.
In the first quarter, the company spent $59 million on capital expenditures, and it had $245 million in adjusted EBITDA and $1.06 billion in cash and cash equivalents. Long-term debt was $7.1 billion, with a debt-to-capitalization of 38.5%, down from 40% the previous quarter.
Commenting on the company’s Q1 performance, Jeremy Thigpen, President and CEO said:
“We believe we are in the early stages of a sustained recovery for offshore drilling. We are very encouraged by the improving macro environment and the ongoing conversations with our customers for opportunities emerging in the second half of 2021 and into 2022.”
On Transocean’s industry position, Jeremy added:
“We’re seeing data points now to confirm our belief, a full-scale recovery in the deepwater market is beginning to emerge later this year. Indeed, as oil inventories continue to deplete, our customers need to replenish the reserve through high-quality cash flow generating projects seen offshore. We are proud to have positioned ourselves as the industry leader in harsh environment and ultra-deepwater drilling, and we’ll continue to deliver best-in-class operating performance while strategically continuing to refine our fleet to further enhance our position. And as always, we remain committed to creating value for our shareholders.”
The global offshore drilling market is expected to reach $7.04 by 2025, at a compounded annual growth rate of 4% from 2021 to 2025. COVID-19 pandemic has had a significant impact on the offshore drilling market as oil prices dropped in 2020 due to delays in oil and gas upstream projects in offshore locations. However, EIA has raised its 2021 Brent oil price forecast to an average of $65.19 per barrel in its June Short Term Energy Outlook (STEO) report. The report highlights that Brent crude oil prices were higher in May as global oil inventories continued to decline. Commenting on this trend, EIA wrote:
“In the coming months, we expect that global oil production will increase to match rising levels of global oil consumption. The rising oil production in the forecast is largely a result of the OPEC+ decision to raise production. We expect rising production will end the persistent global oil inventory draws that have occurred for much of the past year and lead to relatively balanced global oil markets in the second half of 2021 (2H21).”
This could be the potential growth driver particularly with new exploration taking place in various offshore regions across the world, as well as factors including the growing viability of deepwater and ultra-deepwater projects, which are likely to move the offshore drilling market forward. New markets are aggressively pushing the development of offshore assets, particularly deepwater and ultra-deepwater reserves, such as Gabon, Senegal, Guyana, Trinidad and Tobago, Egypt, and the Mexican side of the Gulf of Mexico.
In an earnings release, Jeremy said:
“Gulf of Mexico, activity is expected to increase with several projects starting late this year and in early 2022 with awards expected in the next several months. Importantly, if all of these projects move forward as expected, we believe that the entire Gulf of Mexico fleet of active rigs will be sold out later this year. This is something that the industry hasn’t even contemplated since 2014 and clearly supports a meaningful inflection in day rates at current levels. The increased level of activity we are seeing in the U.S. Gulf of Mexico corresponds to the belief that many of our customers are redirecting their focus to offshore projects from onshore shale opportunities. This is the result of pressure our customers are facing to generate cash flow and acceptable economic returns while maintaining spending discipline, something that Shell has not been able to deliver. We also believe the focus on carbon emissions are playing into investment decisions for our customers”
Despite the favorable industry outlook, crude oil volatility is expected to be a major restraint on the expansion of the offshore drilling market. In 2022, EIA expects Brent’s price to average $60.00 per barrel due to continued rise in OPEC+ production, as well as accelerated growth in U.S. oil production, which will outpace decelerating growth in global oil demand resulting in declining oil prices.
Transocean’s stock has been in an uptrend since March. Investors seeking economically sensitive stocks to recover from the pandemic might want to gain some exposure to Transocean as we believe the company is a good play on the expected recovery of the economy.
*The author does not own any shares mentioned in this article.
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