Transocean: At Least It’s Not Getting Worse?

One day after Transocean (RIG) reported solid earnings, offshore drillers like Atwood Oceanics (ATW), Noble (NE) and Seadrill (SDRL) continue to show resilience.

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Shares of Transocean have gained 0.6% to $38.44 at 11:55 a.m., while Atwood Oceanics has risen 1% to $48.35, Noble has advanced 2.1% to $26.45 and Seadrill is up 1.3% at $36.20.

The question now: Can the strength last? Jefferies’ Brad Handler and team are just thankful that “the tone doesn’t sound worse” from Transocean. They explain:

While outlook commentary from peers this earnings cycle felt incrementally worse vs. earlier, Transocean’s tone was laced with optimism relative to its own prior views and peers’. That said, this relative positive view still felt more vague (hopeful) than grounded in reliable pending developments. For now, we still see challenges, in particular for Transocean’s 5th G fleet as rigs scramble down market/incur idle time. On this point, we note the backlog swap from midwater semi GSF Rig 135 onto UDW 5th G semi Sedco Energy given a pending job on the former highlights that there was an incremental low-spec midwater job, but not a UDW one. Further, the potential for prolonged weakness in the N. Sea (possibly in the early stages of a downturn today), leads us to lower ’16E. Nonetheless, since Transocean called the downturn well ahead of peers in mid-’13, we walk away modestly more comfortable that a broader ’16 recovery could still be in play.

UBS analyst Angie Sedita and team think Transocean has a tough decision ahead:

[Raise] short-term debt or reduce the dividend? On our current estimates the company will need to tap into the full $3 bil revolver in 2015-2016 and will still be drawing down cash. In 2015, we believe Transocean will have to make the decision to either reduce the dividend or increase its debt. Our earnings forecasts are not worst case scenario and assume most of the currently idle rigs return to work in 2015 and that the currently stacked rigs remain stacked. However, we believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels. Regular dropdown proceeds from the MLP should help bolster Transocean's FCF; however it will not be enough, in our view. We believe investors should patiently wait on the sidelines and miss any mini rally versus risk a sustained slowdown and tough capital allocation decisions ahead.