1Q15 results beat analysts’ estimates
Transocean (RIG) posted strong first quarter financial results with revenues of $2.04 billion. This beat the consensus forecast of $1.91 billion. EPS (earnings per share) of $1.10 was significantly higher than analysts’ estimates of $0.60. However, these results don’t fully show the problems the company is facing. The earnings surprise could possibly be due to analysts’ overly cautious estimates.
Significant one-time charges
Transocean recognized a loss of $481 million in its Deepwater Floater asset group, which was identified as most likely not to be recoverable. Additionally, the company planned to sell several rigs and associated equipment for scrap value. An aggregate loss of $393 million was recognized in relation to the impairment of these rigs.
Transocean has been involved in writing down quite a few of its rigs over the past few quarters due to a market characterized by low oil prices. The company also announced on May 18, 2015, that it has idled three more rigs, bringing its total idling units down to 14. The company’s stock fell by more than 5% the following day.
Gloomy short-term outlook for the drilling market
According to Transocean’s recent 10-Q filing, the company expects the short-term outlook for the drilling market to be “challenging.” This is due to weak pricing in the commodity markets, customers’ focus on cost reductions and capital allocation, and delays of programs pertaining to development and exploration.
The significant erosion of energy prices caused a massive fall in the demand for drilling rigs. According to statistics from Baker Hughes (BHI), the US rotary rig count was 888 for the week ending May 15, 2015. This was a fall of 52.3% over the prior year’s figure. This trend and the introduction of newly built units into the market are causing stagnation in the speed at which drilling contracts are executed. This results in increased idle times, lower day rates, and excess capacity for certain rigs.
Energy companies such as EOG Resources (EOG), Occidental Petroleum (OXY), and Pioneer Natural Resources (PXD) hope to increase drilling activity if oil prices continue to continue their upward trend. EOG trades at a price-to-earnings (or PE) ratio of 23.8x. PXD trades at a PE ratio of 27.6x. RIG is part of the Energy Select Sector SPDR Fund (XLE) and the iShares U.S. Oil Equipment & Services ETF (IEZ), with exposures of 0.32% and 2.36%, respectively.