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Transocean Cuts 2013 Capex Guidance

Zacks Equity Research

Offshore drilling giant, Transocean Ltd. (RIG) has reduced its capital expenditure for the year 2013 to $2.4 billion from $3 billion previously. Management reveals that changes in payment timings on under-construction rigs are the main reasons behind the reduction.

Transocean added that roughly $1.3 billion, representing greater than half of the newly designed capital expenditure, will be allocated to build new rigs. Moreover, Transocean has decided to shell out approximately $400 million for the renovation and upgradation of the existing rigs.

Transocean disclosed that six ultra-deepwater drillships and two shallow-water jackups are currently under construction. The jackups are expected to operate at a water depth of 350 feet and can drill up to depths of 35,000 feet whereas the ultra-deepwater rigs will be capable to work at a water depth of 12,000 feet and can drill up to depths of 40,000 feet.

At the same, Transocean has reduced its fleet size to 83 as compared to 136 rigs a few years ago, as it looks to assign capital for high specification drilling rigs.

On May, 8, 2013, Transocean reported earnings per share (excluding special items) to be 93 cents, which is ahead of the year-ago adjusted profit of 75 cents, owing to better utilization of rigs. However, the earnings per share failed to beat the Zacks Consensus Estimate of $1.01 due to a significant increase in operating costs.

Switzerland-based Transocean is the world’s largest offshore drilling contractor and the leading provider of drilling management services worldwide. With less oil being discovered on land and with companies having to dig ever deeper to get to their reserves, Transocean is poised to benefit from a market with robust multi-year demand trends, given its technologically-advanced and versatile drilling fleet.

On the flip side, the introduction of new and more stringent regulations due to the oil spill will likely make deepwater drilling activity prohibitively expensive for exploration and production companies, making many projects marginal. This could reduce the demand for deepwater drilling.

Transocean currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

In the energy sector, three firms that are expected to outperform the broader U.S. equity market over the next one to three months are SM Energy Company (SM), CNOOC Ltd. (CEO) and InterOil Corporation (IOC). All three firms sport a Zacks Rank #1 (Strong buy).

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