Transocean Ltd. (RIG) today reported earnings. Transocean earnings were quite a doozy.
As volatility sustains for oil, offshore drilling companies have continued to face challenging times. and this is reflected in stock volatility among leading offshore drilling companies. Just as an example, Transocean touched a 12-month high of $14.18 on October 9, 2018, and subsequently slumped by 55% to $6.34 by December 24, 2018. This decline was in-sync with a sharp decline in oil price during this period. Transocean has again moved higher by 29.8% from December 2018 lows to $8.23 as on January 22, 2018.
While short-term investors can gain from this volatility, we believe that Transocean is worth accumulating on every correction for medium to long-term as well. So how were earnings?
Well, net loss attributable to controlling interest was $242 million, $0.48 per diluted share, for the three months ended December 31, 2018.
Fourth quarter 2018 results included unfavorable items of $71 million, or $0.14 per diluted share, as follows:
- $18 million, $0.03 per diluted share, loss on impairment primarily for three floaters previously announced for retirement;
- $12 million, $0.02 per diluted share, in acquisition costs; and
- $52 million, $0.11 per diluted share, related to discrete tax expense.
These unfavorable items were partially offset by:
- $11 million, $0.02 per diluted share, bargain purchase gain and other favorable items.
After consideration of these net favorable items, fourth quarter 2018 adjusted net loss was $171 million, or $0.34 per diluted share.
Contract drilling revenues for the three months ended December 31, 2018, sequentially decreased $68 million to $748 million due to lower utilization for the company’s ultra-deepwater and harsh environment fleet. Additionally, fourth quarter results were negatively impacted by unexpected weather-related downtime on two of our harsh environment rigs off the coast of Canada resulting in approximately $21 million in lost revenue. Partially offsetting these decreases was a $15 million increase in revenue from three working rigs acquired as part of the Ocean Rig acquisition in December.
Contract drilling revenues included customer early termination fees of $12 million on the Discoverer Clear Leader in the fourth quarter down from $37 million in the prior quarter. The fourth quarter also included a non-cash revenue reduction of $34 million from contract intangible amortization associated with the Songa and Ocean Rig acquisitions. The third quarter non-cash revenue reduction from contract intangible amortization was $29 million.
Operating and maintenance expense was $497 million, compared with $447 million in the prior quarter. The sequential increase was the result of costs related to the reactivation and contract preparation of Development Driller III and increased activity as a result of the Ocean Rig acquisition.
General and administrative expense was $54 million, compared with $35 million in the prior quarter. The increase was primarily due to professional fees associated with the Ocean Rig acquisition and for developing technology for improving fleet performance and reducing costs and a third quarter legal reimbursement that was not repeated in the fourth quarter.
Depreciation expense was $204 million, up from $201 million in the third quarter of 2018. The increase was primarily due to the acquisition of the Ocean Rig fleet.
Interest expense, net of amounts capitalized, was $165 million, compared with $160 million in the prior quarter. The increase was due to the senior notes issued during the fourth quarter of 2018 partially offset by senior secured term loans assumed in the Songa acquisition and retired in the third quarter. Capitalized interest was $8 million in the third and fourth quarters of 2018. Interest income was $17 million, compared with $11 million in the prior quarter.
The Effective Tax Rate(2) was (82.6)%, down from 6.7% in the prior quarter. The decrease was due to an estimate of a reserve item associated with U.S. tax reform (“2017 Tax Act”) in fourth quarter, offset by the release of certain valuation allowances. Additionally, the relative blend of income from operations in certain jurisdictions and fourth quarter financial results impacted tax expense.
Cash flows from operating activities increased $24 million sequentially to $238 million primarily due to the collection of certain receivables and advance payment for a farmout contract.
Fourth quarter 2018 capital expenditures of $44 million were related to the company’s newbuild drillships along with capital expenditures relating to asset and inventory management systems, reactivation of one rig and capital upgrades for certain rigs in our existing fleet. This compares with $48 million in the previous quarter.
“2018 will be remembered as a transformative year in Transocean’s long and storied history,” said President and Chief Executive Officer Jeremy Thigpen. “Through the acquisitions of Songa Offshore and Ocean Rig UDW, we added approximately $4.5 billion dollars of high margin backlog. And, when combined with our investment in a joint venture to market and operate the Transocean Norge, over the course of 2018, we added 21 rigs to our fleet, including 15 of the highest specification ultra-deepwater and harsh environment floaters in the industry.”
Thigpen added: “We also continued to operate at a high level for our customers, delivering full year 2018 revenue efficiency greater than 95%. This consistently strong operating performance, coupled with the quality of our fleet, our global presence and our customer relationships, helped us to secure 37 new floater contracts throughout the year, almost double the amount we booked in the previous year, and almost 50% more than any other offshore driller. Importantly, these contracts added almost $2 billion to our already industry-leading backlog, our largest annual total in the last four years.”
Thigpen concluded: “As evidenced by the increase in contract awards, we believe that 2018 marked the beginning of a recovery in the ultra-deepwater market. While oil prices remain volatile, the efficiencies that we have realized over the past few years have materially reduced offshore project costs and compressed the time to deliver first production thereby minimizing our customers’ risk and improving the attractiveness of offshore projects. In fact, current customer conversations suggest that FIDs in 2019 could increase materially over last year.”