Transocean's Headwinds Aren't Going Away, J.P. Morgan Warns

• Transocean LTD RIG shares have climbed 26 percent in the last three months, after hitting a low of $11.60 on August 26.
• JP Morgan’s Sean C Meakim maintained an Underweight rating on the company, while reducing the price target from $11 to $10.
• Although the company’s 3Q earnings beat expectations, results were not as good as peers, and secular headwinds continue to impact performance, Meakim said.

Transocean reported its 3Q earnings ahead of the estimates. Analyst Sean Meakim pointed out, however, that “the beat proved a miss” when comparing the company’s results to the performance by peers.

Transocean’s cost beat of 3 percent was much lower than the peer average of about 8 percent. “The company successfully delayed delivery on two Shell drillships, resulting in a mostly neutral impact on liquidity,” Meakim wrote.

Transocean guided to a 25-30 percent y/y decline in opex in 2016, but attributed about 80 percent of savings to reduce activity levels. The 2017 projected liquidity of $4-$5bn implies a cash burn of $200mm-$1.2bn, which in turn translates to an annual CFO of about $1.4-$1.8bn.

In the report JP Morgan noted, “While the liquidity forecast is in line with past commentary and achievable in our view, the means of arriving there looks significantly more painful when coupled with the opex guidance.”

Meakim commented that the company seems to be on “the wrong side of the negotiating table.” Transocean did announce a favorable resolution with Petrobras, “commentary suggests further blend-and-extends are possible, and that the limited tenders available are subject to oversubscribed bidding.”