Transocean Ltd’s (RIG) stock price has been on a downswing following the 52-week high of $85.98 reached on March 3, 2011. The offshore drilling giant has seen its share price fall approximately 20% during this period, as investors have been selling the stock for its weak fundamentals and tepid outlook. The disappointing first quarter results have added to this bearishness.
Transocean, which has been in the news since the disastrous blowout and oil spill in the Gulf of Mexico (GoM), has been suffering from the uncertainty in the deepwater drilling market. The company – with a Zacks #4 Rank (Sell rating) for the short run – has already warned investors regarding the risks associated with the Horizon rig disaster, including legal costs, government investigations and lost revenue.
As a reminder, on April 20, 2010, offshore driller Transocean’s ultra-deepwater Horizon drilling platform, contracted to British oil giant BP plc (BP) sank following an explosion while operating in the U.S. Gulf of Mexico off the coast of Louisiana. The incident killed 11 workers and spewed more than 200 million gallons of crude in what is touted as the worst oil spill in U.S. history.
Subsequently, a moratorium was imposed on offshore drilling in the region at water depths of more than 500 feet, which was lifted on October 12, 2010.
The introduction of new and more stringent regulations due to the oil spill will likely make deepwater drilling activity prohibitively expensive for exploration and production companies, making many projects marginal. This could reduce the demand for deepwater drilling. Further, the decline in utilization rates and average daily revenue has also stalled Transocean’s stock price.
Given these headwinds, we expect the company’s shares to be under pressure in the near future. The Swiss court order rejecting Transocean’s plea on dividend payments and the high out-of-service time during the recently reported quarter are near-term setbacks as well.
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