Transocean: Lagging Peers And Waiting For Catalysts

| About: Transocean Ltd. (RIG)

Summary

Transocean shares underperform more speculative peers.

Unlike in Noble Corp.'s case, the lack of short positions is not a factor.

Will Transocean be a good catch-up play?

Transocean (NYSE: RIG) is another offshore driller that lags both more speculative and safe peers this year. I've already looked at Noble Corp. (NYSE: NE) in an article titled Noble Corp.: Buy The Laggard?

In Noble Corp.'s case, I arrived to the conclusion that the lack of shorts made the stock less sensitive to oil price fluctuations and limited the upside, which, in my view, is highly correlated with the percentage of the short float in offshore drilling stocks. Clearly, the same explanation is not suitable for Transocean, which is a relatively highly shorted stock.

The first obvious suspect for the underperformance is the debt burden, but I don't think that it plays too big of a role in Transocean's case.

The absence of a "debt wall" is clear, as various maturities are spread among many years. Another positive moment is that Transocean relied on bond issues rather than banks, which theoretically provides the ability to buy them at a discount and manage the debt in a more flexible manner compared to negotiations with banks.

Transocean will take delivery of 4 newbuilds between now and the first quarter of 2018, which raises the question whether the company will have the funds to pay for them.

However, all 4 newbuids are contracted at attractive dayrates and Transocean has a credit facility in case it does not have the sufficient cash on the balance sheet.

Newbuilds are on very long-term contracts, so I don't see the risk of termination for convenience - the termination fee will be enormous and neither Shell (NYSE: RDS.A) nor Chevron (NYSE: CVX) will be ready to terminate rigs that were supposed to work for many years.

While the debt and the necessity to pay for the newbuilds is probably not a major worry, there are other things to worry about.

The latest fleet status report showed that Transocean had 22 stacked rigs and 6 idle rigs. My current vision of the situation implies that cold stacked rigs won't see work for at least several years, and most of them will not return to work at all and will ultimately be scrapped. Therefore, there is a great risk that the value of most stacked rigs is zero.

Also, a recent report indicated a new contract for a semi-sub Jack Bates at a very low day rate - $127,000 for 730 days. The previous day rate for a short-term job was $195,000, and earlier the rig worked for $370,000 per day.

If the report is correct, the day rate for Jack Bates collapsed by 66% from previous highs. As I indicated above, Transocean already has a whole fleet of stacked rigs, and the company will probably avoid additional stacking at almost any cost.

Transocean will probably win the scarce jobs by being the lowest bidder for long-term contracts and this will put pressure on the company's bottom line for the future years.

In my view, Transocean is mostly punished for the lack of clear potential catalysts together with a big number of stacked rigs, whose value is likely discounted closer to zero.

The biggest potential for upside lies, of course, in the increase of the oil price. I think that Transocean's shares might have the ability to reach March highs in case oil settles above $50 and stays there for some time.

At the same time, I remain cautious about the longer-term perspectives. The recent upside in oil did nothing to improve the contract situation.

Noble Corp. has recently published its fleet status update, and it showed no new contracts once again. It looks like the only way to win new jobs in the current situation is to bid extremely low, as Transocean reportedly did with Jack Bates.

Fixing low rates for the longer term will put big pressure on the company's finances in the future and will also put pressure on the price of its stock.

I think that Transocean will be a good catch-up play if we see sustained upside in oil, but I don't think that it will be able to get out of the wide trading range of $8-$13 this summer.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.