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How Transocean Was Able to Reduce Costs

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Cost-cutting measures

In 2Q16, Transocean (RIG) successfully reduced its costs. In spite of a fall in revenue, Transocean’s drilling-to-revenue ratio fell to 54% in the second quarter from 60% in the first quarter. In 2Q15, this ratio was 55%.

We should note that to withstand the current industry downturn, offshore drilling companies (OIH) (XLE) have no choice but to reduce their costs as much as possible. Peers Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Seadrill (SDRL), Ocean Rig (ORIG), Pacific Drilling (PACD), and Noble (NE) have also announced cost-reduction plans to maintain profit margins in this challenged industry.

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2Q16 drilling expenses

Transocean’s operating and maintenance expenses showed an improvement of 25% from $665 in 1Q16 to $500 million in 2Q16. This quarter’s expenses were lower than the guidance provided by the company in the first quarter conference call.

Reduced activity was one of the reasons for reduced costs in this quarter. But in addition to this, the company successfully reduced the stacking costs. It accelerated the process of de-manning of idle rigs and also reduced costs related to operating and shore-based expenses.

Guidance

In the third quarter of 2016, Transocean expects its operating and maintenance expenses to range between $425 million to $445 million. For the full year of 2016, this cost is expected to be ~$2 billion. This guidance has fallen by 9% due in part to reduced activity, lower stacking costs, and reduced onshore and offshore expenses.

General and administrative costs

Transocean’s general and administrative costs in 2Q16 were $42 million, which is a decline from the $53 million in the previous quarter.

Transocean expects its general and administrative costs for the full year of 2016 to be around $150 million. Previously, the company had forecasted this cost to total around $160 million.

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