Transocean Ltd. (RIG)

[eastunder]

Transocean: A Clean Beat But Still a Sell

http://blogs.barrons.com/stockstowatchtoday/2016/08/04/transocean-a-clean-beat-but-still-a-sell/?mod=yahoobarrons&ru=yahoo


By Ben Levisohn

Shares of Transocean (RIG) have jumped today following its surprise profit. Citigroup’s Scott Gruber calls it “a clean beat” but still rates Transocean a Sell:


Transocean reported adjusted 2Q EPS of 17c, beating our estimate of 0c and consensus of -1c. The quality beat was driven by stronger improvements to cost control than expected (-13%), contributing ~16c of the delta. A low tax rate also contributed ~2c to the beat.

Revenues vs Citi and Consensus — Transocean’s quarterly recurring revenue of $934mm was slightly ahead of our estimate of $921mm and consensus of $922mm, with some of the delta likely driven by increased revenue efficiency. Revenue continues to roll with contracts as expected, with this period’s sales down 23% vs 1Q and down 50% vs the same period last year…

Transocean’s stock should have a positive reaction to the results, given the sizeable beat on EBITDA and the bottom line. In addition, while the other drillers have essentially matched cost cutting expectations this quarter, Transocean’s beat is a positive outlier. The question going forward is how much lower can costs be lowered through the downcycle. However, while the company continues to make improvements in operating efficiency, our modeling points to valuation downside given its large exposure to fifth gen assets that are likely to remain indefinitely mothballed; our rating for the stock is Sell.