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Transocean Takes Another Big Writedown to Make Way for Its Acquisition — The Motley Fool

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Yet again, Transocean‘s (NYSE:RIG) management has taken drastic steps to preserve its place as one of the top offshore rig companies in the business. This quarter, it decided to retire more rigs and take a huge writedown. At the same time, though, the company is about to close on a multibillion-dollar acquisition of new rigs. While it seems contradictory to do both at the same time, it actually makes sense.

Here’s a brief look at Transocean’s most recent results and what investors should make of these moves. 

Image source: Getty Images.

By the numbers

MetricQ3 2017Q2 2017Q3 2016
Revenue$808 million$751 million$906 million
Operating income($1.14 billion) ($1.54 billion)$229 million
Net income($1.42 billion)($1.69 billion)$218 million
EPS($3.62)($4.32)$0.59

Data source: Transocean earnings release. EPS = earnings per share.

There is a lot to unpack in these results because several events this quarter make these numbers look a bit off. Let’s start with the big loss. Unlike last quarter, where the loss was attributed to the sale of its jackup fleet, almost all of this quarter’s loss is attributed to the $1.39 billion asset impairment charge the company took to retire six of its rigs. Were it not for that impairment charge and another $90 million in charges related to discrete tax expenses, net income would have been closer to $0.16 per share. 

One of the more encouraging results is the increase in revenue compared to the prior quarter, but that too is a bit misleading as the company received $87 million in revenue related to a terminated contract recovery from all the way back in 2015. Since that time, though, one of Transocean’s rigs under construction started a 10-year contract with Shell, and three rigs received new contracts.

The more significant news this past quarter was that management did what it had hinted at doing for some time: make an acquisition. In August, the company announced that it agreed to acquire Norwegian rig company Songa Offshore for $1.2 billion. The deal also means Transocean will assume Songa’s $2.2 billion in debt. 

There are a couple of reasons these assets were so attractive. One is that they are newer rigs that are designed for harsh environments such as the North Sea and Arctic drilling. These kinds of rigs tend to generate much higher day rates since they are specifically designed for these special conditions.

RIG Chart

RIG data by YCharts.

Also, another reason these rigs looked attractive is that they all had long-term contracts in place. All four of Songa’s harsh environment floaters have contracts with Statoil, some of which extend out to 2023. The total backlog of Songa’s rigs is $4.1 billion. When combined with Transocean’s backlog at the end of the quarter, the combined company has $13.5 billion in revenue backlog. 

What management had to say

Here’s CEO Jeremy Thigpen’s comments on what the recent deal for Songa, the retirement of its older rigs, and those new contracts mean for the company over the next couple of years:

In addition to the strong operating results, during the quarter, we continued the high-grading of our fleet by announcing our intent to acquire Songa Offshore, which includes the addition of four new, high-specification, harsh environment semisubmersibles. We also announced our decision to recycle six additional floaters, further improving the overall quality and competitiveness of our fleet.

During October, we issued $750 million of senior unsecured debt with the intent of retiring our near-dated maturities. This action, coupled with cash flow from operations of $384 million, and the anticipated incremental backlog of approximately $4 billion attributable to the Songa Offshore transaction, further extends our liquidity runway, and positions us well for a market recovery.

What a Fool believes

As flashy as all of these moves look on paper, this is a continuation of business as usual for the past few years. All six of the scrapped rigs were more than 15 years old, and the acquisition of rigs should be a surprise to no one who has followed this industry lately. The offshore rig industry is ripe for consolidation as several players have already declared Chapter 11 bankruptcy.

As it stands today, Transocean remains one of the better bets in the offshore industry. It has a lot of contracted backlog to get through the next couple of years. It is winning enough contracts to stop the revenue hemorrhaging over the past couple of years, and it has lots of upside potential with several high-specification rigs ready to work. Add on top of that an absurdly cheap stock price, and Transocean is a stock worth revisiting. 

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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Guess shares tank on lower-than-expected quarterly sales

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Tradebuddy.onlines of Guess Inc. GES, +0.96% fell 12% late Tuesday after the retailer reported third-quarter sales that missed Wall Street expectations. Guess said it lost $2.9 million, or 4 cents a share, versus earnings of $9.1 million, or 11 cents a share, in the year-ago period. Adjusted for one-time items, Guess earned $10.4 million, or 12 cents a share, compared with $9.6 million, or 11 cents a share a year ago. Sales rose 3.3% to $554 million, compared with $536 million a year ago. Analysts surveyed by FactSet had expected adjusted earnings of 12 cents a share on sales of $564 million. Retail revenue in the Americas fell 11%, offset by increases in Europe and Asia, the company said.

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This Little-Known Chinese Stock Is on Fire — The Motley Fool

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Chinese stocks have done reasonably well in 2017, with the Shanghai Composite Index up about 10%. Yet that’s lower than the 15% return of the S&P 500, and when compared with emerging markets overall and the MSCI EM Index’s 25%-plus return, China’s stock market has underperformed.

However, it’s been a strong year for stocks of Chinese companies listed in the United States through American depository shares (ADS). High-profile Chinese companies such as Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) have provided investors year-to-date returns of 106% and 52% as of this writing. Even better, shares of social-media live-streaming platform provider YY (NASDAQ:YY) have blown both out of the water. Below, you’ll find what you need to know about this company.

JD data by YCharts

YY has a long runway for growth

Like Alibaba and JD.com, YY benefits from demographic tailwinds. About 731 million Chinese citizens — more than half of the total population — had Internet access as of year-end 2016. That figure has rapidly increased, growing by approximately 19% per year since 2005. Not only are more Chinese citizens gaining Internet access, but the ranks of the middle class with disposable income are swelling. The Brookings Institute estimates middle-class consumption in the Middle Kingdom will grow 8.5% per year until 2030.

As the leading live-streaming mobile and PC provider, YY benefits from both increased Internet penetration rates and disposable income from a rising middle class. The company currently has 73 million mobile live streaming monthly active users, a 37% year-over-year increase. Look for user growth to continue from its host of online-dating, music, gaming, and sports sites.

YY had a strong quarter

YY’s run appears to be mostly supported by the financials. In the recently reported third quarter, the company increased net revenue 48% from last year’s quarter and net income per ADS by 52%, and the pace of that growth has been quite a bit higher than those who follow the stock closely had anticipated. The company expects strong top-line growth to continue, issuing projections for sales to grow in the fourth quarter by between 36% and 41%. 

Picture of Shanghai at night.

Image source: Getty Images

YY is relatively cheap

Unlike its Chinese peers Alibaba and JD.com, YY is cheaply valued, with shares currently trading at a forward earnings multiple of about 15 times what investors expect YY to earn in 2018. That’s attractive in comparison to the S&P 500’s corresponding forward multiple of about 20. Meanwhile, Alibaba and JD.com trade at much more expensive valuations of 36 and 42 times forward earnings estimates, respectively.

It’s not often you find a company growing its top and bottom lines approximately 50% while trading at multiples lower than the overall market. If you’re an investor in Alibaba and JD.com and are looking for more ways to profit from the demographic shift in China, put YY on your due-diligence list before Wall Street catches wind of the name.

 


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