Late last month, offshore drilling giant Transocean Inc. (RIG) announced its financial results for the fourth-quarter and year-end 2010.
Now that the analysts have had some time to ponder over the quarterly performance of Transocean, they are weighing their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook.
On February 23, 2011, Transocean reported weak fourth quarter and full-year 2010 results, affected by reduced utilization rates and lower average daily revenue along with higher operating costs.
Earnings per share, excluding one-time expenses, came in at 76 cents, below the Zacks Consensus Estimate of 87 cents. In the year-ago period, the company had earned $2.21 per share (on an adjusted basis).
Full-year 2010 earnings, excluding one-time costs, were $6.00 per share, 9.5% below our projection.
Total quarterly revenue came in at $2,160 million, down 21.0% from the year-ago level of $2,733 million and lagging the Zacks Consensus Estimate of $2,299 million. The quarter performance was bruised by lower utilization resulting from idle rigs, legal charges and reduced revenue.
Transocean generated total revenue of $9,576 million in 2010 as compared with $11,556 million in 2009. The full-year revenue also failed to meet our expectation of $9,704 million.
During the quarter, Transocean’s high-spec floaters accounted for the lion’s share of total revenue with approximately 57.1%, while mid-water floaters and jackup rigs contributed about 22.1% and 14.6%, respectively. The remaining revenue came from other rig activities and integrated services.
(Read our full coverage on this earnings report: Transocean Lags Ests, Annually Down)
Agreement of Estimate Revisions
As a result of the quarterly underperformance, analysts exhibit a strong bearish sentiment regarding Transocean’s 2011 and 2012 outlooks. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the company’s December quarter earnings release.
Out of 34 analysts covering the stock, 20 have revised their estimates for 2011 downward, while none have gone in the opposite direction. The trend is similar for 2012 as well. Out of 27 analysts, 12 trimmed their estimates as against 2 positive revisions.
Estimates are down for the March quarter of 2011 as well. For the current quarter, 12 of the 26 analysts have decreased their estimates over the last 30 days, compared to just 2 positive adjustments.
This downtrend in estimate revisions reflects the potential fallout from the Gulf of Mexico (GoM) oil spill. For Transocean, the operator of the Deepwater Horizon drill rig, earnings are likely to suffer from the uncertainty in the near-to-medium term outlook for deepwater drilling.
We further believe that Transocean − and the entire industry − will be subject to more stringent regulations in the future. The company has already warned investors regarding the risks associated with the Horizon rig disaster, including legal costs, government investigations and lost revenue.
Magnitude of Estimate Revisions
As a result of the analysts revising estimates downward over the past 30 days, the Zacks Consensus Estimate for fiscal 2011 has gone down by 67 cents (from $6.65 to $5.98), while for 2012, estimates have dipped by 28 cents (from $7.17 to $6.89). Meanwhile, for the first quarter of 2011, estimates have declined by 20 cents (from $1.25 to $1.05) in the last 30 days.
Transocean, which competes with Diamond Offshore (DO) and Noble Corp (NE), currently retains a Zacks #4 Rank, translating into a short-term Sell rating. However, we are ‘Neutral’ on the stock in the longer-term.
Switzerland-based Transocean, Inc. possesses one of the most modern and versatile rig fleets in the world due to its emphasis on technically demanding segments of the offshore drilling business. As of December 31, 2010, the company owned, had partial ownership interests in, or operated 138 mobile offshore drilling rigs.
Transocean’s drilling fleet consists of 47 high-specification deepwater floaters, 25 mid-water floaters, 9 high specification jackups, 54 standard jackups and other assets utilized to support offshore drilling activities worldwide. Additionally, the company had one ultra-deepwater drillship and 3 high-specification jackups under construction.
With its technologically-advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power, Transocean offers an unmatched level of earnings and cash flow visibility. However, the Deepwater Horizon incident is bound to create some overhang on the stock because of Transocean’s involvement and the ensuing uncertainty in the deepwater drilling market.
The Swiss court order rejecting Transocean’s plea on dividend payments is also a near-term setback, in our view. Consequently, we believe that Transocean’s current valuation adequately reflects its fairly balanced risk/reward profile and see limited upside from current levels.