Transocean's Earnings: Can We Expect Another Big Earnings Hit?

Over the past few quarters, Transocean's income statement has had more red ink on it than a college freshman's first paper. The massive buildup of new rigs coming to market combined with oil and gas producers slowing their desire to spend money on offshore drilling has led to dramatic drops in both Transocean's profits and its stock price.

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While the financial numbers for Transocean have been ghastly as of late, all is not doom and gloom. Some of the things that have devastated the income statement have actually been good things over the long term. Let's take a look at how these seemingly bad events have actually led to more promising times, and what you should look for when the company reports earnings on Aug. 5.

OUCH!Over the past several months, many of Transocean's moves have felt like ripping off a bunch of bandages all at once. Since September of last year, the company has taken $4.6 billion in income statement charges related to goodwill impairments and asset writedowns.These income statement charges have actually masked the fact that over this time frame, the company has remained EPS-positive and generated enough operational cash to cover its capital expenses.

Also, in these past nine months or so, Transocean has identified 20 of its floating rigs to be sold off for parts and sent to the scrapyard. These have been very painful, but very important, steps for Transocean to prepare itself for the next several years in the offshore drilling space.

Most of the rigs Transocean has decided to scrap are its older, less capable rigs. These rigs may still be able to get a contract, but having them available in an already oversupplied market reduces the chances of securing contracts for its newer rigs and drives down contract rates. So, pulling these off the market will help definitely help both Transocean and the entire industry in the long run.

More pain for future gain?If you are concerned that earnings this quarter are going to take those massive hits like they have over the past several quarter, then this might put you at ease. The company currently carries no goodwill on its balance sheet, so there's no chance of another major impairment there. There will likely be some losses related to the scrapping of a few rigs in the quarter, but they certainly won't add up to what we've seen recently.

Transocean wants its future to look at lot more like this. Image source: U.S. Coast Guard.

Longer term, chances are good that Transocean is not done scrapping rigs. There are about 18 more rigs on Transocean's books considered lower-specification rigs that are more than 30 years old, but most are still working under contract. Once those contracts are up, though, it wouldn't be surprising if the company took these rigs off the market as well.

If it were to do so, the company would actually be in pretty good shape from both a fleet and financial standpoint. The remaining floater fleet would all be either ultra-deepwater or harsh-environment capable, and only a few of them would be more than 15 years old. Furthermore, if we assume those older rigs will be taken off the market rather than marketed, then its existing fleet would have decent contract coverage through the end of 2016.

Also, Transocean has managed to delay the delivery of two of its ultra-deepwater drillships out beyond 2019, which means all five newbuild ships set to hit the water in the next couple of years are already contracted out at quite favorable dayrates -- all five will get close to $520,000 per day for their services.

Add all of these things together, and you have the makings of a company that has turned around from dead in the water just a year ago to smoother sailing ahead.

What a Fool believesThe market isn't likely to grant Transocean's stock favors any time soon. If the company does continue to pare down its fleet of older rigs, it will take some writedown charges that will impact the income statement and make quarterly numbers look weak for some time.

However, if you are looking for long-term signs that the company is making the right moves, watch to see if it does indeed unload those older rigs and focus on keeping its newer, higher-specification rigs employed. If it can do those two things over the next couple of years, then the pain today might be worth it tomorrow.

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