Transocean Stock: Think EPS Matters?

Transocean will report after the market close on Wednesday, but it is hard to imagine the first quarter numbers having much of an impact on a stock at the center of the oil spill disaster in the Gulf of Mexico.
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(Transocean earnings preview story updated Wednesday morning for latest oil spill news)

VERNIER, Switzerland (


) --


(RIG) - Get Report

will report after the market close on Wednesday, and it's safe to say that the Street and investors have other issues on their mind than Transocean's quarterly performance.

With the Gulf of Mexico oil spill among the biggest national news stories, the Transocean earnings went from being just another oil and gas industry earnings report to one piece of a much larger economic, political and environmental issue.


(BP) - Get Report

, the owner of the underwater well operated by Transocean, and

Cameron International


, the oil equipment services provider that made the blowout preventer that is one of the suspected oil spill causes, have already reported.

By Wednesday morning, there was a new, worst-case scenario in the Gulf of Mexico: U.S. government officials said that the rate of leakage from the underwater wells might actually be 10 times worse than current estimates of 5,000 barrels daily. BP conceded this worst-case scenario to government officials on Tuesday night in a closed door meeting. Nevertheless, BP engineers had one of their first successes on Tuesday night, when submersible robots that had previously failed to get the job done were able to plug at least one of three leaking underwater wells.

Both House and Senate committees are expected to grill BP and Transocean officials in hearings next week.

Trading in both BP and Transocean shares was positive on Wednesday morning, even as the markets continued in the European-debt triggered tailspin. Transocean shares were up 3% in early trading on Wednesday, while BP shares were up by half that climb. An analyst in London was out on Wednesday with a buy call on BP shares, saying that the selling related to the oil spill was overdone, and that BP, in particular, had become a better value than

Royal Dutch Shell

. Wednesday was the second-consecutive day during which the huge recent slides in BP and Transocean shares ebbed, even as the oil spill crisis widened.

Nevertheless, even with Transocean shares back near $75 on Wednesday morning, just two weeks ago, Transocean shares were trading over $92.

Some analysts say the quarterly numbers from Transocean are meaningless -- a penny or two outperformance or underperformance of Street expectations -- and there is little reason to expect Transocean earnings to move the shares significantly. Shares have already fallen so much that resolution to the uncertain situation in the Gulf of Mexico is really the only catalyst for a rally in Transocean, and oil and gas shares that are linked to the oil spill specifically, or to the risk of larger political risks in offshore drilling.

Cameron reported increased profits and raised its guidance for the year when it reported last Thursday. Yet it didn't beat Street expectations, and Thursday was also the day on which the oil spill worsened; Cameron shares slid in trading, at one intraday point by 22%, according to Weeden & Co. data.

What's more, while Cameron has historically traded at a premium to peer company

FMC Technologies

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, the relative multiples at which these two stocks traded reversed, with Cameron's historical premium turned upside down, and by an extreme margin last Thursday. That kind of atypical trading might serve as a trigger to buy, but Weeden analysts could not recommend a buy on Cameron shares given the overhang from the oil spill that caused the multiple reversal in the first place.

BP beat the Street estimate last week on earnings per share, but its shares also swooned on last Thursday as it became more clear that comparisons between the Gulf of Mexico oil spill and the Exxon Valdez disaster were not unfounded.

Anadarko Petroleum

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, which owns a 25% stake in the BP well, reported on Tuesday morning a jump in profits and sales, and raised its 2010 production guidance.

Anadarko was up less than 1%, though, even though the energy sector was down to a much greater extent on Tuesday. Anadarko's results were not just overshadowed by the Gulf of Mexico oil spill, but a day of major market fears. All the major equity indexes were down on Tuesday as the situation in Europe and with Greek debt continued to roil investors. Energy shares continued down on Wednesday morning even as BP and Transocean rallied.

Many analysts have moved to a hold on several of these stocks, solely due to the ongoing risk from the oil spill. Argus Research took Transocean and BP down to a hold last week.

So what should investors expect from Transocean in its earnings report? The Street consensus is earnings per share of $2.10 and revenue of $6.5 billion. The Street is also estimating a decline in full-year earnings of 25 cents to 35 cents -- of a $9.15 full year earnings consensus -- due to loss of revenue from the Deepwater Horizon rig. Transocean didn't lose any working days during the first quarter because of the oil rig disaster; BP was paying Transocean $500,000 per day to operate the rig.

Nevertheless, Argus analyst Phil Weiss thinks the Transocean earnings are inconsequential. "To a large extent it is a meaningless event because there is such a big overhang. BP had a great quarter, but those earnings meant nothing," Weiss said, adding that even a week later, he still has not written a note on the BP first quarter report.

The Argus analyst is focusing on any information from Transocean on what the oil spill will mean for the offshore industry beyond the immediate event. Weiss said Anadarko didn't seem concerned in its earnings conference call, but Transocean is not a diversified oil and gas players like Anadarko. "Transocean's whole business is extracting oil and gas from offshore wells," the analyst said.

Stifel Nicolaus analyst Thad Vayda said that he doesn't think Transocean will be in a position to provide much clarity on the liability in the Gulf of Mexico, but it does need to provide clarity on how its business is positioned to buffer any change in U.S. policy toward offshore drilling, and manage contracts with energy companies in the event there is a moratorium on offshore drilling. "It would probably be imprudent of them to say too much from a legal perspective in terms of where they fall in the continuum of culpability," Vayda said.

Regardless, the Stifel Nicolaus analyst said Transocean needs to show that its backlog of business can withstand any moratorium on drilling. The analyst said that even as much of the Street thinks the core numbers are meaningless given the oil spill, Transocean needs to show that its core business has opportunities in markets that are perceived to be weak, given fears of a moratorium on drilling in the U.S.

Vayda said that typically energy companies cannot walk away from contracts with offshore drillers regardless of political winds, but investors will need reassurance that Transocean's contracts are solid, also. "In the short-term, I'm indifferent as to whether a customer like BP wants to move the rig to another location, as long as they can't cancel the contract," Vayda said.

The Stifel analyst said there is a non-oil spill risk that since Transocean's last rig fleet update, additional rigs have gone down and impacted first quarter numbers. However, this kind of earnings report risk is meaningless in relation to the decline in Transocean shares of more than $12 since last Thursday.

A third energy market analyst noted that Transocean has 15 of its 73 floating rigs in the Gulf of Mexico, and described that percentage of "floaters" as a significant percentage of revenue. "Drilling contractors have all been asked in the past few weeks about the outlook related to the oil spill, and have been hesitant to comment, and it is probably too early to know, beyond the fact that it's certainly not a good thing for offshore drilling. That said, Transocean has rig exposure in the Gulf of Mexico that is pretty high," the analyst said.

In the earnings context, a full year earnings hit of 25 cents to 35 cents is fairly small relative to a Street consensus of Transocean 2010 earnings of $9.15.

Argus Research analyst Weiss has not even put an earning hit estimate into his Transocean forecast for 2010 because it seemed, he said, insignificant, not only in respect to overall Transocean earnings, but with the respect to the larger context of the oil spill.

"Everyone is shooting first and asking questions later," said Argus Research's Weis, and there was every expectation that questions shot in the direction of Transocean management would prove more important than earnings numbers when Transocean reports on Wednesday after the market close. Earning per share will likely be an afterthought by the time of Thursday morning's Transocean conference call.

-- Reported by Eric Rosenbaum in New York.


>>Oil Spill in Pictures: Gulf of Mexico Impact

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