BMO Still Thinks Transocean Will Underperform, Sees -34% Return From Here

• Transocean LTD RIG shares are down 17 percent year-to-date, despite having climbed 29 percent since September 29.
• BMO Capital Markets’ Daniel J. Boyd maintained an Underperform rating on the company, with a price target of $10.
• The build delay of two drill ships is expected to have a negative impact on the company’s future performance, Boyd said.

Transocean released its Fleet Status Report, or FSR, and announced that it had reached a mutual agreement with its customer Royal Dutch Shell plc (ADR) (NYSE: RDS-A) and shipyard Daewoo to delay two new build drill ships by one year.

Analyst Daniel Boyd views the new build delay as “slightly negative, with an estimated NPV impact of $0.28/share.”

The delay is expected to lead to a decline in the company’s 2017 revenues, EBITDA and EPS. Boyd added, “The delay causes RIG’s net debt-to-EBITDA (TTM) ratio to increase at a faster rate, rising to 6.9x at 2017E year-end from 2.8x in 2Q15 (150% increase).”

The analyst pointed out that in the one month since Transocean’s last fleet status report, one rig had rolled off contract and was idle. The company took steps to lower costs by cold stacking an additional seven rigs, besides announcing one new jack up contract for one well.

The EPS estimates for 2015 and 2016 have been raised from $3.44 to $3.46 and from $6.17 to $6.18, respectively. The EPS estimate for 2017 has been reduced from ($0.40) to ($0.88).