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Rob McCourt

Transocean still presents a significant upside in value after the Fleet Status Report and Q4 Earnings Report came in slightly below estimates.



Revenue Outlook

On the positive side revenue growth was up 10% in FY 2023 after several years of declines marking that the turnaround is starting to take place. Revenue growth accelerated in Q4 to 22.4% YOY. Management provided revenue guidance of $3.6 to $3.75 billion for FY 2024 reflecting a gain of 30% YOY. These results are encouraging, however Q1 guidance was light coming it at up only 20%.


Backlog and Market Conditions

The contract backlog was over $9 billion at year end, up $3 billion YOY but below last quarter’s results of $9.4 billion. Recent contract signing has been slow. Management continues to discuss strong market conditions and the time to complete signings is taking longer since customers are looking to sign longer term commitments. Day rates continue to remain strong in the $475,000-525,000/day range. FY 2024 is the defining year for Transocean’s revenue turnaround and my continued investment depends on management accelerating the signing of contracts, especially stacked rigs and delivering 30% revenue growth in FY 2024.


Margins

Gross margins continue to improve with 75.2% in Q4 versus FY 2023 of 73.7%. Gross Margins bottomed in 2021/2022 in the 71% range. Clearly the higher day rates are flowing through to margins. Operating expense leverage is forecasted to be significant as most rig investment costs have occurred in 2022-2023. Management now projects operating expenses to be in the mid 60% range versus the mid-70 range as investment costs roll off and revenue ramps.


Finally, management stated that they should return to positive earnings in the second half of 2024. This will be a critical milestone for the company and my continued investment.

Leverage continues to be the biggest risk, but management believes they have sufficient liquidity.


Valuation

I have updated my financial projections and valuation (see below) and have a year-end target of $6.70/share in 2024, $11.13/share in 2025, and $14.88/share in 2026. Clearly if management executes well in 2024 shares should begin to trade on forward earnings which would provide upside to my 2024 target.



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