Following the third quarter earnings miss, we have downgraded offshore drilling giant Transocean Ltd. (RIG) shares to Underperform from Neutral.
Switzerland-based Transocean is the world’s largest offshore drilling contractor and the leading provider of drilling management services worldwide. The company owns, has partial ownership interests in, or operates 137 mobile offshore drilling rigs. Transocean’s drilling fleet consists of 47 high-specification deepwater floaters, 25 mid-water floaters, 9 high specification jackups, 53 standard jackups, and 3 other rigs utilized to support offshore drilling activities worldwide. Additionally, the company had one ultra-deepwater drillship and 3 high-specification jackups under construction.
Transocean recently reported lower-than-expected EPS for the September quarter – 5 cents versus the Zacks Consensus Estimate of 75 cents and the year-ago profit of $1.36 – adversely affected by the decline in utilization rates and high operating costs.
Transocean, whose ultra-deepwater Horizon drilling platform – contracted to British major BP Plc (BP) – sank following a fire and explosion while operating in the U.S. Gulf of Mexico last year, is already struggling with the ensuing uncertainty regarding the company’s potential liability exposure. The high out-of-service time, together with the rise in net debt/reduction of liquidity associated with the recently completed Aker acquisition, are also near-term setbacks, in our view.
To add to these woes, the Swiss offshore driller’s recent issuance of new stock – that represents roughly 8% of the company’s total outstanding shares – has led to investor skepticism regarding the continuity of the current dividend payout by the company. There are also apprehensions that the share sale would seriously dilute Transocean’s earnings.
Given these concerns, we expect Transocean to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).
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