Transocean (RIG, Financial) has been through difficult times and I expect the stock to move lower in the coming quarters. With the company releasing its 4Q14 results and also releasing the 10K on Feb. 26, there is a case for further discussion on the stock in terms of the revenue, EBITDA and cash flow outlook for 2015. This article provides the outlook for 2015 along with a conclusion that Transocean is likely to move lower in the coming quarters. Therefore, my bearish view is maintained for the stock.
The first point of discussion is the company’s revenue outlook for 2015. According to the company’s 10K release, Transocean has a revenue backlog of $5.5 billion for 2015. Assuming that Transocean receives no further contracts in 2014, the company’s revenue is likely to slump from $9.2 billion in FY14 to $5.5 billion in FY15. However, this is a bearish case scenario as there will be potential contract additions through the year. However, I don’t expect it to be significantly high considering the point that I don’t expect oil price recovery to come soon.
For now, I am assuming the bearish scenario to estimate the potential cash flow for 2015. For 4Q14, Transocean generated an operating cash flow of $566 million on revenue of $2.2 billion. Considering $5.5 billion backlog for 2015 and a quarterly revenue estimate of $1.4 billion, the potential quarterly cash flow for 2015 is likely to be significantly lower as compared to 2014.
In my view, the cash flow is likely to be in the range of $1 to $1.2 billion. I am considering a conservative operating cash flow due to idle rigs and due to the fact that the average day rate for 2015 is likely to be 395,000 as compared to 2014 average day rate of $454,000.
With the company’s capital expenditure for 2015 at $1.3 billion, I believe that the operating cash flow will be just sufficient to cover for the capital expenditure. Therefore, if Transocean has to continue paying dividend in 2015, it will be through debt and I don’t see that scenario panning out. My opinion there is that Transocean will suspend dividends for 2015.
Even for 2016, Transocean has a capital expenditure of $1.8 billion and this implies that the pressure on the company’s debt position will sustain in 2015 and 2016. While debt servicing will still happen, the company’s debt that is due for refinancing in 2015 and 2016 will be re-financed at a higher cost of debt due to the overall increase in risk in the offshore markets. Therefore, Transocean is unlikely to see any respite from higher debt over the next two years and I believe that this factor will keep the stock depressed.
The company’s contract backlog for 2016 also remains weak at $3.9 billion. While the contract coverage for 2016 will improve over the next 10 months, a high capital expenditure for 2016 means that free cash flow might be minimal. In other words, Transocean is unlikely to come back to paying dividends in 2016.
Considering these negative factors related to the company’s contract coverage and cash flow, it is unlikely that Transocean will move higher in the coming months. On the contrary, the stock is likely to decline further as 2015 quarterly results are announced. Therefore, my view is to avoid the stock even at current levels and investors who are looking for stocks in the offshore drilling sector can consider Ensco (ESV) and Atwood Oceanics (ATW) as these are relatively better bets in the industry.
