Transocean's Earnings Decrease 20% Year Over Year, But Is It A Sell?

Transocean Ltd. (RIG) is an international provider of offshore contract drilling services for oil and gas wells. The company reported earnings after the market closed on 26Feb14 and on the surface all the results were bad with the company reporting earnings of $0.73 per share (missing estimates by $0.02) on revenue of $2.33 billion (missing estimates by $30 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenues

Segment Revenues (millions)	4Q13	4Q12	Y/Y
Ultra-Deepwater Floaters	$ 1,098	$ 1,198	-8%
Deepwater Floaters	$ 255	$ 275	-7%
Harsh Environment Floaters	$ 283	$ 220	29%
Total High Specification Floaters	$ 1,636	$ 1,693	-3%
Midwater Floaters	$ 429	$ 464	-8%
High Specification Jackups	$ 143	$ 108	32%
Contract intangible revenue	$ (6)	$ 10	-160%
Total contract drilling revenues	$ 2,202	$ 2,275	-3%
Client reimbursable revenues	$ 42	$ 40	5%
Integrated services and other	$ 8	$ 3	167%
Drilling management services - non-US	$ 80	$ 8	900%
Total other revenues	$ 130	$ 51	155%
Total revenues	$ 2,332	$ 2,326	0%

Looking at the segment revenues at first glance is very boring as you look at the bottom line and notice that revenue was flat from last year. First thing I notice is that there was a 29% increase in Harsh Environment Floaters (which accounts for 12% of all revenues) which helped stem the loss of revenues in the Total High Specification Floaters segment. I then notice a 32% increase in High Specification Jackups (accounts for 6% of total revenues) but there was a 160% decrease in Contract intangible revenue (which is almost negligible to revenues) which made total contract drilling revenues decrease by 3%. At 0.34% of all revenues, Integrated services and other revenue increased by 167% while Drilling management services (which accounts for 3.4% of all revenues) increased by 900% helping total other revenues increase by 155%!

Income Statement

Income Statement	4Q13	4Q12	Y/Y
Revenues	$ 2,332	$ 2,326	0%
Operating and maintenance	$ 1,532	$ 1,438	7%
Depreciation	$ 275	$ 278	-1%
General and administrative	$ 75	$ 65	15%
Total costs and expenses	$ 1,882	$ 1,781	6%
Loss on impairment	$ (27)	$ -	N/A
Gain on disposal of assets, net	$ (16)	$ (4)	300%
Operating income	$ 407	$ 541	-25%
Interest income	$ 13	$ 13	0%
Interest expense, net of amounts capitalized	$ (139)	$ (180)	-23%
Other, net	$ (7)	$ (16)	-56%
Total other income	$ (133)	$ (183)	-27%
Income from continuing operations before income tax expense	$ 274	$ 358	-23%
Income tax expense	$ 46	$ (74)	-162%
Income from continuing operations	$ 228	$ 432	-47%
Income from discontinued operations, net of tax	$ 7	$ 25	-72%
Net income	$ 235	$ 457	-49%
Net income attributable to noncontrolling interest	$ 2	$ 1	100%
Net income attributable to controlling interests	$ 233	$ 456	-49%
Average diluted shares	361	360	0%
GAAP Income per diluted share	$ 0.65	$ 1.27	-49%
Non-GAAP Litigation matters	$ 0.03	$ -	N/A
Non-GAAP One-time termination benefits	$ 0.01	$ -	N/A
Non-GAAP Termination of GW5 lease	$ 0.01	$ -	N/A
Non-GAAP Loss on impairment of assets	$ 0.07	$ -	N/A
Non-GAAP Gain on disposal of assets in discontinued operations	$ (0.01)	$ -	N/A
Non-GAAP Loss (income) from discontinued operations	$ (0.01)	$ (0.07)	-86%
Non-GAAP Discrete tax items and other, net	$ (0.01)	$ (0.28)	-96%
Non-GAAP income per share	$ 0.74	$ 0.92	-20%

Now this is where the earnings report begins to look repugnant as you look at the bottom line and notice that non-GAAP earnings have decreased by 20%! I'd like to figure out what was going on at the company that made this happen. General and administrative expenses increased 15% from last year which helped total costs and expenses increase 6% from the prior year. Losses on disposal of assets increased by 300% from last year which assisted in operating income to decrease a whopping 25%! Interest expenses decreased by 23% while other losses decreased by 56%. These items helped total other income decrease by 27%. Income from continuing operations before income tax expenses decreased by 23% while income tax expenses decreased by 162% causing income from continuing operations to decrease by 47%. Income from discontinued operations decreased 72% and overall net income decreased 49%. Net income attributable to non-controlling assets increased 100% but was insignificant to the bottom line. Before taking into consideration non-GAAP items the company's earnings per share are down a whopping 49%, but when taking into consideration non-GAAP items we get a 20% drop.

Balance Sheet

Balance Sheet	4Q13	4Q12	Y/Y
Cash and cash equivalents	$ 3,243	$ 5,134	-37%
Trade	$ 2,112	$ 1,940	9%
Other	$ 50	$ 260	-81%
Materials and supplies, net	$ 743	$ 610	22%
Assets held for sale	$ 148	$ 179	-17%
Deferred income taxes, net	$ 151	$ 142	6%
Other current assets	$ 325	$ 382	-15%
Total current assets	$ 6,772	$ 8,647	-22%
Property and equipment	$ 28,443	$ 26,967	5%
Less accumulated depreciation	$ (7,720)	$ (7,118)	8%
Property and equipment of consolidated variable interest entities, net of accumulated depreciation	$ 984	$ 1,031	-5%
Property and equipment, net	$ 21,707	$ 20,880	4%
Goodwill	$ 2,987	$ 2,987	0%
Other assets	$ 1,080	$ 1,741	-38%
Total assets	$ 32,546	$ 34,255	-5%
Accounts payable	$ 1,106	$ 1,047	6%
Accrued income taxes	$ 53	$ 116	-54%
Debt due within one year	$ 160	$ 1,339	-88%
Debt of consolidated variable interest entities due within one year	$ 163	$ 28	482%
Other current liabilities	$ 2,072	$ 2,933	-29%
Total current liabilities	$ 3,554	$ 5,463	-35%
Long-term debt	$ 10,379	$ 10,929	-5%
Long-term debt of consolidated variable interest entities	$ -	$ 163	-100%
Deferred income taxes, net	$ 374	$ 366	2%
Other long-term liabilities	$ 1,554	$ 1,604	-3%
Total long-term liabilities	$ 12,307	$ 13,062	-6%

On the current assets side of things we see that cash and cash equivalents have decreased 37% which is pretty high. Other assets decreased 81% while materials and supplies increased 22%. Assets held for sale decreased 17% while other current assets decreased 15%. None of these things helped current assets which saw a 22% drop from the prior year. Net property and equipment actually increased 4%. Other long-term assets decreased 38% and made total assets decreased 5%. On the current liability side of the equation we get a 54% decrease in accrued income taxes, 88% decrease in debt due within one year and 29% drop in other current liabilities. We did get a 482% increase in debt of consolidated variable interest entities due within one year, and overall we saw total current debt decrease 35%! Long-term debt of consolidated variable interest entities decreased 100% and we saw total long-term liabilities decrease 6%.

Conclusion

The company reported non-GAAP earnings which were 20% lower than the year before on flat revenue while the share price was down 18.7% in the past year excluding dividends. The decrease in earnings was due primarily to poor operating efficiency. This earnings report is crappy to say the least because I don't like to see flat revenues with poor operating efficiency. On a fundamental basis I believe this company is inexpensively valued with respect to 2015 earnings. The stock was down 1.07% the day after reporting earnings in the face of an S&P500 which gained 0.49%. I'm going put the stock in the penalty box till I see some better operating efficiency.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Transocean's Earnings Decrease 20% Year Over Year, But Is It A Sell?

Disclosure: I am long RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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