No. of Recommendations: 6
Hi everyone,

Release: http://phx.corporate-ir.net/phoenix.zhtml?c=113031&p=iro...
Transcript: http://seekingalpha.com/article/254915-transocean-ceo-discus...
Slide deck: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...
Supplementary slides: 4 PDF files dated 2/23/11 at http://www.deepwater.com/fw/main/Financial-Reports-54.html

Well, it seems that Transocean is another in a list of companies who saw their earnings released early, according to the WSJ: http://blogs.wsj.com/deals/2011/02/23/transocean-another-ear.... Apparently, they had posted the results online, expecting nobody to find them until the press release went out. Oops.

Unfortunately, it showed a GAAP loss and an adjusted miss relative to expectations ($0.68 vs $0.89 EPS for Q4). These results include a $1 billion impairment charge taken on its standard jackup rig assets. Ouch.

Bad news first:
• Both revenue and net income (even adjusted) fell YoY for both Q4 and all of 2010.
• Operating and maintenance expenses were up YoY.
• CFFO was up for the quarter, but down for the year, YoY. Fortunately, it still greatly exceeds net income, so that isn't a major concern (yet).
• Utilization rates were down, meaning fewer rigs were working.
• Revenue efficiency was down, as a direct result. This measures contract drilling revenue divided by the most contract drilling revenue that could have been earned.

In my opinion, these are the consequence of the Gulf of Mexico (GOM) disaster from last year and the continuing (illegal) moratorium in the GOM (more on this in a moment). That disaster put a damper on the whole industry with an increase in rigs available for hire.

Good news:
• $3 billion in cash on the books, adding to an increased level of equity.
• Five new high-specification jackups will be constructed, and they're under a five-year contract to Chevron.
• Day rates for ultradeepwater rigs seem to be firming up and increasing a bit.
• Brazil and Petrobras are expected to suck up a lot of drilling capacity beginning this year, as they begin to drill the big off-shore fields that have been discovered over the past couple of years.
• The first deepwater drilling permit since the GOM disaster was issued just a couple of days ago.
• Internal review of what happened at Macondo (GOM) is finishing, and the company is implementing what it's learned to turn around revenue efficiency levels, hitting 97% in India and the Middle East. Expect to return to historical levels this year.
• Canceled the $1 billion 2010 distribution by par value reduction (which needed regulatory approval and was denied). Instead, will pay a $1 billion dividend out of additional paid in capital over four equal quarterly installments (needs just shareholder approval).


Regarding the drilling moratorium in the GOM, the first one was declared illegal after being challenged and the second one (which was imposed at the time the first one was canceled) was lifted last October. But there's been a de facto moratorium with the Dept. of the Interior delaying the granting of permits. Ensco sued the federal government and just a couple of weeks ago, a federal judge ruled that the 4-month to 9-month delays being imposed were unreasonable and ordered the government to act on them within 30 days. Yesterday, Noble Energy was granted a drilling permit, though the DOI says this was not in response to the judge's order.

We knew that there would be a delay in getting drilling back in the GOM, but this is probably slower than I expected. Transocean has (had) a relatively small part of its rigs in the GOM, but they were the best paying ones (11 of the 12 rigs Transocean had operating there were the ultradeepwater ones). While they've been earnings standby rates, mostly, that's not been as much as the operating dayrates they were collecting. Now, Transocean is preparing to move at least one of them out of the GOM, though it wouldn't say how many in total or which one(s).

There's been a pickup in shorter-term contracts for the ultradeepwaters and dayrates are in the mid to high $400,000 range, even over $500,000 on occasion, which means things are firming up. Petrobras will probably contract several rigs from Transocean and others while its own rigs are being built (first one delivered in 2015). That will suck up a lot of the oversupply ("overhang" was the word used).


Regarding the new builds of jackups, it seems kind of silly after taking a $1 billion impairment on jackups to build new ones. Not quite. The ones taking the impairment charge are older ones not being used. They'll probably end up being sold or scrapped (my guess, though a question on this did come up).

The new ones are only being built because they have a contract to Chevron and they're going to earn back (I believe) 80% of their cost within that contract. The return on investment is high enough (over the estimated 10% cost of capital) to justify it, especially over the 35-year expected life span. The analysts on the call dug in a bit to explore the idea of only building what will be used right away, rather than building on spec and hoping somebody comes along and wants to use it. CEO Newman was quite adamant that they would only build supply to meet demand, unlike competitors. (Kind of like Western Digital that way.) I like that.

Finally, while high oil prices hurt other parts of the economy and the consumer, it's good for this part of the economy as more exploration and extraction happens. That's also going to use up supply and help return things to "normal."

Cheers,
Jim
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