Transocean's $1 Billion in Cost Cuts Fails to Excite Investors

Updated on
  • Shares slump after company reports sales declined 29 percent
  • Company to cut operating and maintenance costs by 25%-30%

A Transocean Ltd. plan to slash more than $1 billion in costs next year wasn’t enough to excite investors of the world’s largest offshore rigs provider as signs warn of more pain ahead.

The Vernier, Switzerland-based company said Thursday it expects to cut operating and maintenance costs by 25 to 30 percent in 2016 from this year’s projection of as much as $3.75 billion. A day earlier, the company reported third-quarter revenue tumbled 29 percent and said in a federal filing that it doesn’t expect the number of contract drilling awards to increase next year. Shares fell as much as 7.9 percent.

"As bad as it was in ’15, it’s going to be even worse in ’16," J.B. Lowe, an analyst at Cowen Securities in New York who rates the shares the equivalent of a hold and owns none, said in a phone interview. Although investors see costs coming down, they also must be wondering “if costs are going to be that low, it means a bunch more rigs are going to be idle than we thought.’"

In addition to an oil price slump, the offshore rig industry has been suffering from a glut of new drilling vessels continuing to enter the market. At the same time customers have been pulling back on work because of rising offshore costs.

Less Spending

Through the first 10 months of the year, Transocean has added little more than 10 percent of the amount of new backlog that it did for the same period a year earlier, according to data compiled by William Foiles and Andrew Cosgrove, analysts at Bloomberg Intelligence. To keep pace, Chief Executive Officer Jeremy Thigpen has had to look for ways to cut costs further, including less spending on idled rigs, vessels under construction and dividend payouts to shareholders.

Transocean said Thursday it scrapped another floating rig, bringing its total to 22. The company has retired more than half of all scrapped floating rigs in the industry.

Similar to what Diamond Offshore Drilling Inc. announced on Monday, Transocean said on the call that it struck a deal with Petroleo Brasileiro SA to cancel two contracted rigs working in Brazil and will add 747 days of work to a third rig there. The deal will mean a net of $164 million in additional backlog for Transocean.

Contracting Front

“It’s been tough on the contracting front,” Luke Lemoine, an analyst at Capital One Southcoast in New Orleans who rates the shares the equivalent of a sell and owns none, said before the earnings release. “The real question is what do they do with some of their idle rigs. To get costs lower, they have to do something with those.”

Thanks largely to a tax rate that was half the one for the previous quarter, the company’s adjusted per-share profit for the third quarter exceeded by 22 cents the 65-cent average of 31 analysts’ estimates compiled by Bloomberg.

“Operationally, the quarter was average at best,” Rob Desai, an analyst at Edward Jones in St. Louis, who rates the shares the equivalent of a hold and owns none, said in a phone interview. “It really came down to the taxes for why they came in above where we were.”

Shareholders agreed last month at a special meeting to cut the third and fourth installments of their dividend. The company also announced last month a deal with its shipbuilder and with customer Royal Dutch Shell Plc to delay delivery of two ultra-deepwater drillships under construction.

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