On May 24, 2013, we retained our Neutral recommendation on offshore drilling giant Transocean Ltd. (RIG). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
For Transocean – the operator of the Deepwater Horizon drill rig – the recent settlement with the U.S. government, which freed it from some of the civil/criminal claims associated with the accident, has removed an enormous possible monetary liability. Nevertheless, we expect Transocean shares to remain soft until it fully works its way through claims related to the BP plc (BP) oil spill.
Detailed Analysis
With less oil being discovered on land and with companies having to dig ever deeper to get to their reserves, Transocean is poised to benefit from a market with robust multi-year demand trends, given its technologically-advanced and versatile drilling fleet.
In particular, Transocean is the industry leader in deep sea drilling. The company’s state-of-the-art mobile offshore drilling fleets worldwide can function in most challenging environments, such as the North Sea.
The recent dividend approval and the settlement of a host of civil/criminal claims associated with the Deepwater Horizon incident have also eased the overhang on the stock.
At the same time, we acknowledge that operational issues – such as fluctuating dayrates and costs – have held the company back. We also remain worried about the offshore driller’s high debt.
Finally, while Transocean has come a long way since the 2010 Deepwater Horizon rig disaster and settled a host of civil/criminal claims associated with the incident, it can still be held responsible for certain punitive damages and required to pay compensation.
Stocks that Warrant a Look
While we expect Transocean to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Newpark Resources Inc. (NR) and Dawson Geophysical Co. (DWSN) as good buying opportunities. These energy equipment service providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.
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