Transocean (RIG) Stock: Explodes On Strong Earnings

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Transocean Ltd (NYSE: RIG)

Transocean is having an incredibly strong trading session in the market today, and for good reason. The company reported its earnings for the second quarter, beating expectations and exciting investors. Today, we’ll talk about what we saw from the report, how the stock reacted to the news, and what we can expect to see from RIG moving forward.

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RIG Reports Strong Earnings

As mentioned above, Transocean reported its earnings for the second quarter after the closing bell yesterday. The report was overwhelmingly positive. Here’s what we saw:

  • Earnings Per Share – When it comes to earnings per share, RIG definitely did not disappoint. During the quarter, analyst expected that earnings would come in flat at exactly 0. However, the company blew away these estimates by reporting earnings at $0.17 per share. While this figure did beat expectations, it proved to be a big decline from $1.11 per share reported in the same quarter last year.
  • Revenue – RIG also proved to do incredibly well in the quarter in terms of revenue. During the second quarter, analysts expected that the company would produce revenue in the amount of $920.73 million. However, the company actually reported that revenue came in at $943 million. Once again, this figure blew away expectations, but showed year-over-year declines. In the same quarter last year, the company generated $1.88 billion in revenue.
  • Cash Flow – Another important figure that was released was cash flow. During the quarter, cash flow fell to $307 million. This is a drastic decline from $631 million seen in the same quarter last year. Transocean said that the decline in cash flow was primarily the result of contract termination fees.

How The Market Reacted To The News

As investors, we’ve learned to watch the news. After all, positive news leads to gains. In the case of RIG, the news that was released after hours was, indeed, positive. While we are seeing year-over-year declines, that was to be expected. Even so, the company blew away analyst expectations in terms of both revenue and earnings. As a result, we’re seeing gains in the value of the stock. Currently (1:12), Transocean shares are trading at $10.94 each after a gain of $0.49 per share (4.64%) thus far today.

What We Can Expect To See Moving Forward

While the second quarter report came in well ahead of expectations, the year-over-year declines show troubling signs. With massive declines in revenue, the company has been forced to go through a cost cutting process to maintain earnings. However, it is unclear how much more cost cutting the company can sustain. In fact, Citigroup believes that this is going to be a major struggle. In a recent comment, the bank had the following to offer about RIG:

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 large exposure to fifth gen assets that are likely to remain indefinitely mothballed.”

Another thing to keep in mind is that Transocean is an offshore drilling contractor. This means that the company’s revenue is highly exposed to spot market oil prices. When oil declines, the company sees declines in revenue, as evidenced by the massive revenue declines we’ve seen over the past year. And, unfortunately, oil doesn’t seem to be recovering any time soon. So, this will likely continue to add headwinds for RIG.

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What Do You Think?

Where do you think RIG is headed moving forward? Join the discussion at TalkTRENDZ!

[Image Courtesy of Wikimedia]

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