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Transocean Beats on EPS, Revenue Spills

Transocean, the rig operator at the heart of the BP oil spill, reports earnings ahead of the Street consensus after the market close on Wednesday.



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reported earnings of $2.22 on revenue of $2.5 billion in the June quarter. It was a beat on the bottom line but a miss on the top line revenue. Shares were down 2% in after hours trading, though Transocean has rallied all week.

The Street was expecting earnings of $1.68 from Transocean on revenue of $2.56 billion. The Street consensus has come down from $1.88 three months ago. There was one analyst who had not adjusted his Transocean earnings model, providing a high-end estimate at $1.92. The low-end estimate from the Street was $1.48.

The $2.22 included an earnings gain of $267 million related to insurance from the BP oil spill, and without that gain, net income would have come in short of Street estimates.

There was a lot of noise in the EPS number though -- $18 million of additional litigation matters, as well as $69 million (after-tax) of Macondo-related expenses. There's also mention of a 30 cent earnings loss ($96 million in net charges) related to asset write-downs as well as discrete tax items and the sale of an interest in a JV.

It might be tough to get a clear read on the Transocean earnings before the Thursday morning conference call and discussion with management.

The revenue miss of near $100 million was primarily due to contract drilling revenue reductions, including $80 million resulting from the stacking of rigs, $69 million from rigs operating on contracts at lower day rates, $61 million from increased rig time in shipyards and mobilizations and $37 million associated with the loss of Deepwater Horizon, Transocean said.

In the previous June quarter, Transocean reported earnings of $2.79 on revenue of close to $2.9 billion, missing the Street consensus on earnings per share.

For the full year, the Street is estimating earnings of $7.72 from Transocean on revenue of $10.48 billion. That's down from a consensus call of Transocean earnings at $9.17 three months ago.

The recent gains for Transocean aren't an oil spill milestone. Transocean shares have traded as high as $55 in recent weeks. Still, the big rally ahead of its earnings is helping arguments that Transocean has the most room to run as the oil spill becomes less of an overhang on the stock.

Some analysts think Transocean shares deserve a value of at least $70, regardless of the earnings.

Phil Weiss of Argus Research and Collin Gerry of Raymond James both hold this bullish opinion on Transocean, which had traded at $92 before the oil spill wiped out half of its market value.

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>>Transocean Earnings: Room for Shares to Run

In the least, Transocean shares rallied ahead of the Wednesday after hours report, up as much as 8% intraday, one of the biggest gains in the energy sector. It was a day of elevated trading in Transocean shares also, with more than 15 million shares trading hands, well above its average daily volume of 9.4 million shares traded.

Transocean led the energy-sector rally on Monday, too, and this week shares of the oil rig operator are up roughly $7.50 at the close on Wednesday.

BP announced on Wednesday what it called a "significant milestone" in the oil spill response, with its static kill operation taking control of well pressure, and the White House reported that near 75% of the oil spilled by the BP Macondo well had been dispersed.

David Smith, an analyst at Johnson & Rice, said that Transocean will benefit the most of the oil spill stocks when the relief well finally provides the permanent seal on the well. It could be argued that the Transocean relief well rally was starting early with the success of the static kill.

It comes down to day rates for the riggers, and Gerry thinks he is being conservative in hit modeling of day rates in the new deepwater world, with a range between $200,000 to $400,000. "Most renegotiations we've seen so far have been OK," Gerry said. A long-term bullish view on crude oil -- which surpassed $80 this week -- will push day rates back up to the $500,000 level, the analyst argues. It's an outlook that would take Transocean right back to the $90 to $100 range at which it traded before the oil spill.

Even short of that scenario, the Raymond James analyst thinks that Transocean will generate enough cash flow to deserve a value of $70. Gerry also thinks that it comes down to the liability versus insurance issue, with upside to the $70 Transocean share predicated on liability not in excess of insurance.

-- Written by Eric Rosenbaum from New York.


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