Transocean (RIG) was supposed to release its financial results yesterday after the close. Instead, it delayed the release until Nov. 10 after taking nearly $2.8 billion in charges.
Kommersant via Getty Images Canaccord Genuity’s Alex Brooks and Richard Griffith have the details on Transocean’s writedown:
Transocean has delayed its 3Q results due to the "complexities involved" in determining $2.76bn in impairments, of which $1.97bn is a writedown of goodwill due to a decline in "market value", and $0.79bn in the Deepwater Rig asset group due to drops in day-rates and utilisation…
There are 12 rigs in the Deepwater Rig group, all benign environment, 4G and 5G units, of which three are already idle without any future contracts. Three are fully booked through 2015, but the remaining six look likely to go idle for much of 2015, even if two have options. Given that these options are at rates of $370k and $420k, and prevailing day-rates for this category of unit are below $350k, we do not expect the options to be exercised. Our understanding of a writedown is that it implies profit generation will be less than the cost of capital; we already expect the group to be generating EBITDA losses from 2016E and therefore our best guess is that the fair value of this fleet is the PV of its contracts, which we estimate at $590m.
Perhaps surprisingly, Brooks and Griffith left their price target on Transocean unchanged at $20. They explain why:
Clearly in themselves the writedowns have only a small impact on numbers: these are entirely non-cash charges. However, they indicate that even within Transocean, projections for earnings are poor…
When the 3Q numbers are available, we expect EBITDA of $783m down 22% y/y and EPS of $0.80 down 53% y/y, largely because of the decrease in active rig-days in the period (down 9% y/y) and the consequent increase in non-operating costs as guided on the 2Q call. We have not changed our US$20 fair value target, and we maintain our view that further writedowns will be required.
Presciently, Brooks and Griffith all but predicted such a move in a report released yesterday:
We believe the worldwide floating rig market is significantly over-supplied, and that all paths to a balanced market go through the permanent retirement of a large part of the existing fleet. Rates need to be low for an extended period to force owners of older rigs to retire vessels, and we do not expect a turn until 2017 at the earliest. This downturn pre-dates the oil price slide: orders slowed sharply as long ago as 3Q13 and lower oil prices will simply turn a bad market, worse. As one of the top two rig companies, Transocean is unavoidably a play on this downturn: and as the owner of some older assets that need to be retired, we believe a significant part of its asset base is of little value. Our rig rate assumptions imply that Transocean will be close to earnings breakeven for the foreseeable future, even if it remains free cash positive. Icahn's campaign notwithstanding, we expect the dividend to be suspended.
Brooks and Griffith also noted yesterday that the “oil service industry remains under pressure, with asset-heavy companies the most affected.” As a result, they cut their target on Seadrill’s (SDRL) Norwegian shares to NKr 125, and reduced estimates by 14% for 2015 and by 26% for 2016. Needless to say, they have Transocean and Seadrill rated Sell.
Shares of Transocean have dropped 0.7% to $29.71, while Seadrill has ticked up 0.3% to $21.78.
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