Transocean at 52-Week Low on Weak Offshore Drilling Market

Shares of Transocean Ltd. RIG fell to a 52-week low of $32.20 on Sep 25. In fact, the Vernier, Switzerland-based offshore drilling powerhouse has seen its stock price plummet some 26% over the past three months. The freefall seems to be the result of the bleak industry outlook that has engulfed the sector participants.

Why the Bearishness?

Like its peers Hercules Offshore Inc. HERO, Diamond Offshore Drilling Inc. DO and Ensco plc ESV, Transocean's most pressing concern, at least in the short-term, is the oversupply in the rig market. With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the offshore drilling space is likely to see intense competition, as multiple firms chase a single contract. This excess capacity, in turn, has led to lower utilization or dayrates.

Secondly, the offshore contract drilling industry is perceived to be a highly cyclical one and the current thought is that rates had already peaked for this cycle back in late 2013. As the sector looks to enter a cyclical downturn, drillers such as Transocean prefer to hold on to their higher technology specification rigs, thereby significantly denting the company's fleet utilization and profitability.

While Transocean has come a long way since the 2010 Deepwater Horizon rig disaster and settled a host of civil/criminal claims associated with the incident, it can still be held responsible for certain punitive damages and required to pay compensation.

Coming to company specific issues, following the Zacks Rank #3 (Hold) driller's acquisition of Norway's Aker Drilling ASA for approximately $2.2 billion – including a net debt of $800 million – we remain worried about the rise in net debt and reduction of liquidity.

Finally, in the wake of weak industry sentiment and apprehensions of more punishing times ahead with future cash flows drying up, Transocean's current dividend yield of around 9% seems unsustainable.