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Factors Setting the Tone for Transocean's (RIG) Q4 Earnings

Zacks Equity Research

Transocean Ltd. RIG is expected to release fourth-quarter 2018 results after the close of trading on Feb 18.

In the preceding three-month period, the offshore drilling powerhouse beat the Zacks Consensus Estimate by 166.7% on the back of higher-than-anticipated revenues from the ultra-deepwater floaters, which are the largest contributor to the company’s sales.

As far as earnings surprises are concerned, the Switzerland-based rig supplier is on a firm footing, having surpassed the Zacks Consensus Estimate thrice in the last four quarters, delivering average positive surprise of 55.2%. This is depicted in the graph below:

Transocean Ltd. Price and EPS Surprise

Transocean Ltd. Price and EPS Surprise | Transocean Ltd. Quote

Investors are keeping their fingers crossed and hoping that the company can continue winning ways by surpassing earnings estimates this time around too. However, our model indicates that Transocean might not beat on earnings in the fourth quarter.

Which Way are Estimates Treading?

The current Zacks Consensus Estimate for the quarter to be reported is a loss of 24 cents on revenues of $734.6 million. While revenue estimates reflect 16% year-over-year increase, earnings estimates for the fourth quarter of 2018 are in line with the year-ago reported figure. Notably, the Zacks Consensus Estimate for fourth-quarter loss per share has widened by a penny over the past seven days.

Let’s delve deeper and take a look at the factors shaping up the upcoming results.

Factors at Play

Transocean’s High-Specification floaters — comprising ultra-deepwater and harsh environment floaters — account for a major bulk of the total revenues. Notably, the Zacks Consensus Estimate for revenues from its ultra-deepwater floaters is pegged at $410 million, higher than the year-ago figure of $404 million. Further, revenues from harsh environment floaters are expected at $298 million, representing a 184% rise from $105 million recorded in the fourth quarter of 2017. Revenues of $19 million from Midwater floaters are also anticipated to be higher than the year-ago period.

However, the Zacks Consensus Estimate for revenues from deepwater floaters is pegged at $17.4 million, representing a decline from the prior-year figure of $37 million.

As it is, the massive decline of oil prices during the fourth quarter made the scenario a bit uncertain. Notably, crude plunged from a multi-year high of $76.40 a barrel in early October to below $45 in late December amid weakening demand, supply glut along with concerns of economic slowdown. Offshore drilling, which is way more expensive than drilling on land, is more sensitive to oil prices. As such, when spot prices are low, companies like Transocean can suffer from cancellations of orders from customers, which may impact revenues. As it is, reduced dayrates are affecting the profits of the company.

Moreover, over the past few quarters, the company is also bogged down by operational inefficiencies, which are hurting its margins. Transocean’s operating and maintenance expenses rose 37.5% year over year to $447 million in the last reported quarter. Rig reactivation and scrapping costs are likely to weigh on the company's margins in the coming periods.

While higher year-over-year revenue estimates for high-specification floaters (which account for around 90% of Transocean’s top line) bode well, we remain concerned about the reduced dayrates and higher expenses, which may dent overall profits of the company.

What Does Our Model Say?

Our proven model does not conclusively predict that Transocean will beat the Zacks Consensus Estimate in the to-be-reported quarter. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -17.02%. This is because the the Most Accurate Estimate stands at a loss of 28 cents a share, wider than the Zacks Consensus Estimate of 24 cents.

Zacks Rank: Transocean currently has a Zacks Rank of 3, which increases the predictive power of ESP. But we also need to have a positive Earnings ESP to be confident of a positive surprise.

Note that we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks to Consider

Here are some firms from the energy space that you may want to consider on the basis of our model, which shows that these have the right combination of elements to post an earnings beat in the upcoming releases:

Concho Resources Inc. CXO has an Earnings ESP of +0.25% and a Zacks Rank #3. The company is set to release fourth-quarter earnings on Feb 19. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ensco plc ESV has an Earnings ESP of +2.63% and a Zacks Rank #3. The company is expected to release fourth-quarter earnings on Feb 28.

Cheniere Energy, Inc. LNG has an Earnings ESP of +84.51% and a Zacks Rank #3. The company is set to release fourth-quarter earnings on Feb 26.

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Transocean Ltd. (RIG) : Free Stock Analysis Report
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