3 Reasons Why Transocean Shares Could Be Poised To Re-Test $40

| About: Transocean Ltd. (RIG)

Most of the oil sector stocks have posted a sharp rally in the past several weeks and many are even trading at or near 52-week highs. Oil giants like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are good examples of the recent uptrend, with both trading near new highs. Offshore oil drilling companies like Ensco plc (NYSE:ESV) are also trading near 52-week highs. However, shares of Transocean Ltd. (NYSE:RIG) are still trading well below the 52-week high, and the stock has not been a leader in the oil sector rally. This apparent underperformance could be poised to continue.

Here are three reasons why Transocean shares might remain under pressure and even re-test the $40 per share level it hit in June:

1. The macro issues are likely to become increasingly challenging for the price of oil and stock valuations in general. The recent bounce in oil due to the announcement of Bernanke's plans for more quantitative easing has already faded, and the oil market is well supplied. That could mean oil is headed lower, especially since economic data in China and Europe continue to point towards a global slowdown.

Companies like Transocean tend to be viewed favorably by investors when oil prices are very high. That's because offshore projects, which might not be economically viable if oil prices are low, could become very profitable if oil is well over $100 per barrel. Oil could be poised to head lower and take Transocean shares down with it, especially if Middle East tensions don't lead to a supply disruption.

2. The "fiscal cliff" might begin to loom large on the U.S. stock market for a variety of reasons. The United States could be facing much higher tax rates on income as well as dividends in the coming months. Mandatory government budget cuts are also expected to be imposed. Countries in Europe that have raised taxes and cut government spending have seen a major decline in their economy. That is why investors should be more concerned about the U.S. Fiscal Cliff.

Analysts at Citigroup (NYSE:C) believe that stocks could fall about 20% in value due to the fiscal cliff. At current levels, a 20% drop for Transocean shares would take the stock down to about $40.

3. Transocean has at least two major legal issues that continue to hang over the company and the stock. One issue is the involvement in the BP (NYSE:BP) oil spill, which occurred in the Gulf of Mexico. On the positive side is that Transocean has already reserved about $2 billion in order to cover a settlement for liability arising from the spill with the U.S. Justice Department.

One article states that the Justice Department and Transocean are considering a settlement in the amount of $1.5 billion. However, there are other legal issues pending with both BP and private parties, and it's not clear when those would be resolved.

The other issue is related to a spill that took place off the coast of Brazil. Officials in that country are alleging environmental damage, and are considering major fines against companies like Transocean and Chevron. One article states that fines of up to $20 billion could be sought for this incident alone. If Transocean needs to pay a major fine for this matter, the shares could be once again poised to trade around $40.

Key Data Points For Chevron:

  • Current Share Price: $117.78
  • 52-Week Range: $86.68 to $118.53
  • Dividend: $3.60, which provides a yield of 3.1%
  • 2012 Earnings Estimate: $12.91 per share
  • 2013 Earnings Estimate: $12.49 per share
  • P/E Ratio: about 9 times earnings

Key Data Points For Transocean:

  • Current Share Price: $47.42
  • 52-Week Range: $38.21 to $60.09
  • Dividend: none
  • 2012 Earnings Estimate: $3.01 per share
  • 2013 Earnings Estimate: $4.62 per share
  • P/E Ratio: about 15 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I 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.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

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