Transocean: Buy Transocean With Caution

| About: Transocean Ltd. (RIG)

Summary

Transocean Limited is the largest offshore drilling service provider on market with a market cap of $5.2B.

The industry has been hammered by the recent oil downturn, but Transocean remains in a very strong financial position.

The author recommends speculative investors to buy Transocean with caution.

Introduction

Transocean Ltd. (NYSE:RIG) is the largest offshore drilling company by market cap at $3 billion. The company, like most offshore drillers, are unable to sign many new contracts for its rigs and jackups as Brent is now sitting around $56. However, the company's financial situation is strong enough to remain without liquidity trouble for at least three more years of current oil prices. As a result, Transocean is in a strong position and poised to survive the downturn comfortably. Investors looking for offshore exposure may want to purchase the company's common shares now.

Company Facts

  • Share price: $13.75 per share
  • Cash on hand: $2.53 billion
  • Current debt: $1.07 billion
  • Total current liabilities: $2.3 billion
  • Projected capital expenditure in the next 12 months: $400M

Contract Situation

Transocean's current contract situation is not impressive according to its fleet status report. The company has a total of 70 vessels, and approximately one third of them are idle, another one third expires within the next nine month, and the last one third are long term contracts.

Total Vessels for Transocean 70
Stacked and Idle Vessels 28
Expiring within 2017 23
Long term contracts 22

*Expiring contracts will be a big challenge for Transocean as it will decrease incoming contract revenue for the rest of 2017.

Based on these figures, it can be said that Transocean's forward revenues will stay below current levels, which are $80 million in net income per quarter. The net income for the coming quarters should range from around ($100M) to $50M.

Debt, Liabilities, and Capital Expenditure

Transocean has $11 billion in total liabilities, in which $1.07 billion are due within a year. Given that the company has $2.3 billion cash on hand and around $80 million net income per quarter, it will not have any problems servicing its debt for the next year.

Of course, the company is also devoted to building ships, and it will spend a total of $402 million for 2017. However, the capital expenditure will drop to ~$100 million for the two years thereafter, which significantly helps Transocean's financial situation. Refer to the chart below for Transocean's capital expenditure plans in its newbuild forecast:

Transocean's expenditure plans. Notice how it does not plan to spend much during 2018 and 2019, helping the company's bottom line.

Current Oil Prices and Transocean beyond 2017

Currently, oil is trading near $57 for Brent and $54.50 for WTI. In fact, these prices have increased significantly from $47 from a few months ago, thanks to the OPEC decision and action to cut production by 1.2 MBPD. However, an additional oil recovery in the next 12 months is expected to be limited, and oil is expected to stay between $55 and $60 per barrel for 2017.

Supporting this view are NYMEX future prices and the U.S. Energy Information Agency's prediction for oil prices for the next 12 months. The image below shows the predicted future price curve stalling around $56 to $60 for the next year.

The IEA predicts a flat oil price for the next 12 months - stabilizing near $56 Brent.

Transocean's finances will turn for the better from 2017 and onwards. For one, Transocean will scale back capital expenditures from 2017 to 2019. In fact, there are almost no expenditures during these three years, which significantly helps the company avert any unforeseen circumstances in the oil market.

Conclusion

The offshore drilling industry has been hammered by the recent crude downturn, and Transocean has been part of the bloodbath. However, the company is well capitalized compared to its competitors. In closing, Transocean is in a good position to survive the downturn, and investors looking for offshore exposure may want to purchase now.

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.

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