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Can Transocean (RIG) Keep the Earnings Streak Alive in Q1?

We expect offshore drilling powerhouse Transocean Ltd. RIG to beat expectations when it reports first-quarter 2016 results after the closing bell on Wednesday, May 4.

In the preceding three-month period, the Vernier, Switzerland-based firm delivered a positive earnings surprise of 130.14% despite the challenging environment posed by the steep drop in commodity prices throughout the quarter. The outperformance came on the back of outstanding revenue efficiency and cost reduction initiatives.

Importantly, Transocean has outpaced the Zacks Consensus Estimate in all of the past four quarters with an average beat of 88.47%.

Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Transocean is likely to beat earnings in the to-be-reported quarter because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP for this company stands at +7.69%. This is because the Most Accurate estimate stands at 28 cents, whereas the Zacks Consensus Estimate is pegged lower at 26 cents. A favorable Zacks ESP serves as a meaningful indicator of a likely positive earnings surprise.

Zacks Rank: Transocean carries a Zacks Rank #3 (Hold) which, when combined with a positive ESP, makes us confident of an earnings beat.

Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. On the other hand, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

What is Driving the Better-Than-Expected Earnings?

As is the case with other offshore drillers, Transocean’s revenues/earnings have borne the brunt of the freefall in realized commodity prices over the past 18 months. As oil remains in a bearish territory, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as offshore exploration for new oil and gas projects has almost come to a standstill.

However, Transocean has come up with certain strategy initiatives to overcome the industry-wide slump and outperform earnings estimates yet again in the second quarter.

Firstly, with an aggressive cost reduction program, Transocean is looking to shore up its operational performance even in this weak oil and gas pricing environment. As part of this strategy, the company has embarked on a policy to optimize overhead and maintenance expenses.

Secondly, Transocean has zeroed its focus on reducing out-of-service times by carefully planning the frequency of its in-service maintenance and shipyard repairs.

Finally, Transocean has set itself an ambitious target to achieve a very impressive 95% revenue efficiency for 2016. As it is, the company is coming off two consecutive years with revenue efficiency at or above 95% The continuation of this trend will aid operating margin in the to-be-reported quarter.

Other Stocks to Consider

Transocean is not the only company looking up this earnings season. Here are some companies from the energy space which, according to our model, also have the right combination of elements to post an earnings beat this quarter.

DCP Midstream Partners L.P. DPM has an Earnings ESP of +9.52% and a Zacks Rank #2. The company is expected to release earnings results on May 4.

Enable Midstream Partners L.P. ENBL has an Earnings ESP of +21.05% and a Zacks Rank #2. The company is anticipated to release earnings on May 4.

McDermott International Inc. MDR has an Earnings ESP of +100.00% and a Zacks Rank #3. The company is likely to release earnings on May 5.

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ENABLE MIDSTRM (ENBL): Free Stock Analysis Report
 
MCDERMOTT INTL (MDR): Free Stock Analysis Report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
DCP MIDSTREAM (DPM): Free Stock Analysis Report
 
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