Offshore drilling giant Transocean Ltd. ( RIG ) reported strong first quarter 2012 results, buoyed by an improvement in utilization levels and rising rig rates.
Earnings per share, excluding special items, came in at 64 cents; double that of the Zacks Consensus Estimate of 32 cents and also ahead of the year-ago adjusted profit of 59 cents.
Total quarterly revenues of $2,331.0 million were up 8.7% year-over-year but missed the Zacks Consensus Estimate by 3.6% and, mainly attributable to lower efficiency on deep-water and mid-water floaters and a dip in drilling management services activity.
Transocean's high-spec floaters contributed approximately 68% to total revenue, while mid-water floaters and jack-up rigs accounted for 15% and 11% of the total, respectively. The remaining revenue came from other rig activities, integrated services and others.
During the quarter, the company's operating income totaled $270 million, down 27.4% year over year. This can be attributed to higher operating and maintenance expenses, which increased 3.8% to $1,410.0 million on the back of higher rig-related upkeep, repair and equipment certification costs.
Dayrates & Utilization
Compared to the first quarter of 2011, dayrates rose 2.6% (from $292,600 to $300,300), favorably impacted by a 10.3% rise in high-spec floater dayrates, offset to some extent by lower dayrates among mid-water floaters.
Overall fleet utilization was 61% during the quarter, up from first quarter 2011 utilization rate of 55%.
Capital Expenditure & Balance Sheet
Capital expenditures during the quarter totaled $260 million, of which the lion's share went to Transocean's contract drilling services segment. As of March 31, 2012, Transocean had cash/cash equivalents of $3,982.0 million and long-term debt of approximately $9,940.0 million (representing a debt-to-capitalization ratio of approximately 38.7%).
Recommendation & Rating
Switzerland-based Transocean is the world's largest offshore drilling contractor and the leading provider of drilling management services worldwide.
We acknowledge that operational issues - such as tepid revenue efficiency and high costs - have held the company back. We also remain worried about the offshore driller's mounting debt following the purchase of Norway's Aker Drilling ASA for approximately $2.2 billion.
However, with its technologically-advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power, the company offers an unmatched level of earnings and cash flow visibility. A recent court ruling, which absolves RIG of some of the cleanup cost related to the Deepwater Horizon incident, has also eased the overhang on the stock. Nevertheless, we expect Transocean shares to remain soft until it fully works its way through claims related to the BP plc ( BP ) oil spill.
As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).