Jefferies: Transocean No Longer A Sell

Transocean LTD RIG shares are trading sharply higher on Monday – up nearly 6 percent after Jefferies analyst Eduardo Royes upgraded the company to Neutral from Underperform. While Royes said the firm still saw "challenging market conditions," they are "more comfortable" with Transocean's position.

Relatively, Royes saw three incremental positives. First, Transocean has "material" operating expense savings potential. Second, the company has a strong liquidity position. Third, Jefferies said it is shifting its view based on "our better appreciation for the quality of the fleet and overall operations." Further, the third point could lead to "modest […] upside surprise potential."

Jefferies also said that the company should not have "any liquidity constraints in the near and medium-term" even though it has among the highest leverage among competitors. At current prices, with a $0.60 annual dividend, the stock yields over 4 percent.

Despite these upsides, the Jefferies note suggests that Transocean still may face challenges. The $13 price target, which is up from $12, is well below the last price of $14.30. Further, Royes said that the largest risks to the firm would be a 2016 rig market that deteriorates further and/or "unforeseen cash drains."

As the oil and oil services markets have declined this year, Transocean has followed, dipping nearly 22 percent on the year. In the past 52 weeks, however, the stock price has declined precipitously – collapsing 63 percent.