Is Transocean Delaying The Inevitable?

In a new report, analysts at Deutsche Bank criticized Transocean LTD RIG for "kicking the can down the road" and claim that "decisive action is needed." Analysts believe that improving liquidity should be Transocean's top priority.

Recent Actions Are Not Enough

In the report, analysts acknowledged that Transocean has done a good job recently of cutting costs, improving operations and highgrading its fleet. However, they also believe that the company's lack of liquidity is overshadowing the positive strides it has made.

Need For A Long-Term Solution

Analysts believe the company has sufficient short-term liquidity, but feel that Transocean is "clearly lacking" in long-term liquidity if the current downturn extends beyond 2015. Since it seems likely that the downturn will last beyond this year, analysts argue that now is the time for Transocean to explore equity issuance.

Related Link: Transocean Beats Q4 Expectations, Shares Surge

They concede that such an issuance is mathematically dilutive, but feel that the stock is currently discounting the potential for bankruptcy, which would be reduced if the company were to increase its liquidity.

Updated Outlook

After Transocean's recent Q4 earnings beat, Deutsche Bank analysts raised their 2015 earnings per share (EPS) estimate from $2.14 to $2.20. However, analysts slashed their 2016 EPS estimate dramatically from a $0.40 per share profit to a $1.85 per share loss.

Deutsche Bank maintains its Sell rating on Transocean and currently has a $6.00 price target on the stock, a more than 60 percent downside from its current levels.

Analysts arrive at their price target based on discounted cash flow, capex requirements and debt level analysis.