Canaccord Trims Transocean Price Target On Increasing Risks

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In a report issued Monday, Canaccord analyst Alex Brooks trimmed his price target on Transocean LTD RIG from CHF14.30 ($14.21) to CHF12.00 ($11.92), maintaining a Sell rating.

The company's fourth quarter results showed "impressive cash generation. Despite a working capital outflow, and another $0.75/sh dividend payment, Transocean managed to hold debt steady in 4Q, with free cash flow of $248m," the report said. Strong ability of rigs was driven by high revenue efficiency, day-rates and cost control.

Despite the encouraging results, the analyst highlights the negatives: "there is currently significant over-supply of rigs, and (given weak demand and steady newbuild deliveries) every path to higher rates goes through the retirement of a significant part of the existing fleet, which can only happen if rates stay lower for longer. This means that a large chunk of Transocean's fleet needs to be retired - many of the midwater and deepwater units - beyond what has already been delivered."

On top of this well-known risk, Brooks pointed out that the situation could get worse. According to the analyst, the are two risks not yet discounted in the market: 1) refinancing and 2) contract renegotiations.

Canaccord cut its EPS estimates for 2015 by 6 percent, and increased its forecast loss in 2016 to $0.50 (from $0.09). Furthermore, they see the company delivering losses out to the end of 2019.

"If all existing contracts are honoured, we see that the current market value of Transocean is too low: but with earnings going negative, ongoing headline risk, and debt ratios looking ugly," the firm remains a seller of the stock, despite it trading at 20-year lows.

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Posted In: Analyst ColorPrice TargetAnalyst RatingsAlex BrooksCanaccord
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