January 14, 2015 Transocean Ltd. (RIG-NYSE) Current Recommendation Prior Recommendation Underperform Date of Last Change 02/14/2012 Current Price (01/13/15) $15.52 Target Price $16.00 NEUTRAL SUMMARY We are maintaining our Neutral recommendation on Transocean shares, despite the dismal commodity pricing scenario, operational issues and high debt. The company offers an unmatched level of earnings and cash flow visibility, given its technologicallyadvanced and versatile offshore drilling fleet, strong backlog and considerable pricing power. The recent settlement of a host of civil/criminal claims associated with the Deepwater Horizon incident has also eased the overhang on the stock. Nevertheless, we expect Transocean shares to remain soft until oil prices rebound and the company fully works its way through claims related to the BP oil spill. SUMMARY DATA 52-Week High $48.53 52-Week Low $15.51 One-Year Return (%) -47.99 Beta 1.82 Average Daily Volume (sh) 14,450,397 Shares Outstanding (mil) 362 Market Capitalization ($mil) $5,622 Short Interest Ratio (days) 5.86 Institutional Ownership (%) 67 Insider Ownership (%) 1 Annual Cash Dividend $3.00 Dividend Yield (%) 19.33 5-Yr. Historical Growth Rates Sales (%) -2.3 Earnings Per Share (%) -11.6 Dividend (%) 11.1 using TTM EPS 3.3 using 2015 Estimate 7.0 using 2016 Estimate 20.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Large-Value Industry Oil&Gas-Drill Zacks Industry Rank * 222 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 2,184 A 2,364 A 2,449 A 2,332 A 9,329 A 2014 2,339 A 2,328 A 2,270 A 2,147 E 9,084 E 2015 1,959 E 1,865 E 1,972 E 2,155 E 7,951 E 2016 7,539 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.94 A $1.08 A $1.37 A $0.73 A $4.12 A 2014 $1.43 A $1.61 A $0.96 A $0.75 E $4.75 E 2015 $0.55 E $0.31 E $0.62 E $0.74 E $2.22 E 2016 $0.75 E Projected EPS Growth - Next 5 Years % 5 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Switzerland-based Transocean, Inc., with the very appropriate NYSE ticker of RIG, is the world s largest offshore drilling contractor and the leading provider of drilling management services worldwide. As of May 15, 2014, the company owned, or had partial ownership interests in, and operated 78 mobile offshore drilling rigs. Transocean s drilling fleet consists of 46 high-specification deepwater floaters, 21 mid-water floaters, and 11 high specification jackups. Additionally, the company had 9 ultra-deepwater drillships and 5 high-specification jackups under construction or under contract to be constructed. Transocean's fleet is considered to be one of the most modern and versatile in the world due to its emphasis on technically demanding segments of the offshore drilling business. Transocean s fleet can be broadly divided into three distinct groups based on drilling capabilities: highspecification floaters (semi-submersibles and drillships), midwater floaters, and jackup rigs, which accounted for 72%, 18% and 6%, respectively, of its total revenues for 2013. The remaining portion related to other rigs, contract intangible revenues, and revenues derived from drilling management services, integrated services, oil and gas properties etc. Following its merger with GlobalSantaFe in November 2007, Transocean operates in 2 business segments (Contract Drilling Services and Other Operations). The Contract Drilling segment includes floaters, jack-ups and other rigs used in support of offshore drilling activities and offshore support services on a worldwide basis, while the Other segment consists of drilling management services and oil & gas properties. Transocean s 47 high-specification floaters are specialized offshore drilling units capable of drilling in water depths of 4,500 feet and more. The company s 21 mid-water floaters are capable of drilling in water depths of approximately 300 feet to 4,500 feet, while the jackup rigs are generally suited for water depths of 400 feet or less. Equity Research RIG Page 2
REASONS TO BUY With less oil being discovered on land and companies having to dig ever deeper to get to their reserves, Transocean is poised to benefit from a market with robust multi-year demand trends, given its technologically advanced and versatile drilling fleet. In particular, Transocean is the industry leader in deep sea drilling. The company s state-of-the-art mobile offshore drilling fleets worldwide can function in the most challenging environments, such as the North Sea. Transocean significantly reduced its operating expenses during the last few quarter. Moreover, the company expects its full year operating and maintenance cost in the band of $5.1 $5.2 billion, lower than the $5.8 billion and $6.1 billion reported in 2013 and 2012, respectively. Transocean s strong backlog, which now stands at roughly $24 billion, not only reflects steady demand from its customers but also offers an unmatched level of earnings and cash flow visibility. This enables Transocean to navigate the current uncertain environment better than many of its peers. Transocean s latest annual dividend of $3.00 per share, is 33.9% higher than the year-ago dividend of $2.24. This reflects the company s strong ability to allocate capital for profitable projects that generate significant returns for its shareholders. REASONS TO SELL Transocean derives its revenues from companies in the oil and gas exploration and production industry, a highly volatile and cyclical sector that is directly exposed to commodity prices. As a result, the ongoing slump in oil and gas prices have curtailed deepwater drilling and dampened equipment demand, adversely affecting bookings at Transocean. Following Transocean s acquisition of Norway's Aker Drilling ASA for approximately $2.2 billion including a net debt of $800 million we remain worried about the company s rise in net debt and reduction of liquidity. While Transocean has come a long way since the 2010 Deepwater Horizon rig disaster and settled a host of civil/criminal claims associated with the incident, it can still be held responsible for certain punitive damages and required to pay compensation. Transocean conducts operations in various regions throughout the world, with a substantial portion of its total revenues and earnings coming from international markets. As such, the company is exposed to risks associated with operating in international markets. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc. The introduction of new and more stringent regulations due to the oil spill has made deepwater drilling activity prohibitively expensive for exploration and production companies, making many projects marginal. This could reduce the demand for deepwater drilling. Equity Research RIG Page 3
RECENT NEWS Third Quarter 2014 Results On Nov 9, 2014, Transocean reported third-quarter 2014 adjusted earnings per share from continuing operations of $0.96, surpassing the Zacks Consensus Estimate of $0.77. Improved dayrates and lower expenses drove the outperformance. However, the bottom line deteriorated from the year-ago adjusted profit of $1.37 per share on lower fleet utilization. Quarterly total revenue of $2,270 million beat the Zacks Consensus Estimate of $2,210 million but fell from the year-ago quarter figure of $2,449 million. Transocean's high-spec floaters contributed approximately 71.2% to the total revenue, while mid-water floaters and high-spec jackup rigs accounted for 19.5% and 6.8%, respectively. The remaining revenues came from rig activities, integrated services and others. Operating Statistics Transocean reported operating loss of $2,168 million during the quarter compared with earnings of $738 million in third-quarter 2013. A non-cash goodwill impairment loss of $2,768 million hampered the results. Meanwhile, total operating and maintenance expenses decreased about 5% year over year to $1,318 million. Dayrates & Utilization Total average dayrates increased to $409,900 in the quarter under review from $392,400 in the yearearlier quarter. The increase is attributable to higher dayrates from all its assets. Overall fleet utilization was 75%, down from the year-ago utilization rate of 83%. Capital Expenditure & Balance Sheet Capital expenditures during the quarter totaled $365 million. As of Sep 30, 2014, Transocean had cash and cash equivalents of $2,873 million and long-term debt of $9,991 million (representing a debt-to-capitalization ratio of approximately 40%).. Equity Research RIG Page 4
VALUATION Transocean projects 2014 operating and maintenance cost between $5.1 billion and $5.2 billion, significantly lower than the 2013 and 2012 levels. We believe that with reduced expenses, the company will be able to improve its full year earnings to a great extent. Nevertheless, we expect Transocean shares to remain soft until commodity prices recover sufficiently and the company fully works its way through claims related to the BP oil spill. These factors are reflected in our continued Neutral recommendation on the shares. Transocean s current trailing 12-month earnings multiple is 3.3X, compared with the 7.3X industry average and 18.6X for the S&P 500. Over the last five years, Transocean s shares have traded in a wide range of 3.9X to 36.3X trailing 12-month earnings. Our $16 price objective reflects a 2015 multiple of 7.2x, well within historical trading ranges. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Transocean Ltd. (RIG) 7.0 20.7 5.0 2.2 3.3 36.3 3.9 Industry Average 12.1 9.5 16.1 2.9 7.3 95.4 6.9 S&P 500 16.2 15.1 10.7 15.9 18.6 19.4 12.0 Caspen Oil Inc. (CSPN) Paragon Offshore plc (PGN) 2.1 Nabors Industries Inc. (NBR) 8.0 9.0 21.5 2.2 10.0 37.5 6.8 SeaDrill Ltd. (SDRL) 3.4 4.0 2.5 3.9 25.4 4.9 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Transocean Ltd. (RIG) 0.4 1.3 0.4 10.5 0.7 19.3 3.8 Industry Average 3.1 3.1 3.1 5.9 1.1 8.1 5.9 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research RIG Page 5
Earnings Surprise and Estimate Revision History Equity Research RIG Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of RIG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1106 companies covered: Outperform - 15.2%, Neutral - 78.7%, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research RIG Page 7