Transocean (RIG), a provider of offshore drilling services for oil and gas wells, looks to leverage its fleet, which is focused on ultra-deepwater and harsh environment drilling services, to take advantage of recent developments. The company has secured a four-well option with Reliance Industries Limited in India, contributing an estimated $111 million to a robust $9.3 billion backlog. However, it reported a net loss of $494 million in Q3 of 2024. Wall Street analysts have downgraded Transocean’s rating based on a challenging industry environment and lowered global oilfield services activity assumptions.
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Despite this, the Trump administration’s anticipated impact on the oil and gas industry presents a potentially bullish turn, making this a stock that investors interested in fossil fuels may want to keep an eye on.
Promising Development
Transocean is an offshore contract drilling service provider for oil and gas wells. It focuses on technically demanding sectors, specifically ultra-deepwater and harsh environment drilling.
The company’s portfolio includes ownership or partial ownership of a fleet comprising 34 mobile offshore drilling units. This fleet is further divided into 26 ultra-deepwater floaters and eight harsh environment floaters.
Transocean recently announced it is set to exercise a four-well option with Reliance Industries Limited, a leading company in India. This strategic move marks an extension of its existing firm term with Reliance. The program, estimated to last approximately 270 days, is projected to generate a significant backlog of around $111 million, excluding potential revenue from additional services.
A Substantial Backlog
For the third quarter, the company saw an increase in contract drilling revenue to $948 million, thanks to higher rig utilization, day rates for two rigs, and reimbursement revenues. This increase was also due to a full quarter’s revenue from the new ultra-deepwater drillship Deepwater Aquila.
Operating and maintenance expenses increased to $563 million, reflecting increased fleet activity, but this was partially offset by reduced costs from the acquisition of Orion Holdings Limited. General and administrative expenses fell to $47 million due to personnel early retirement and lower fees. The net loss attributable to controlling interest was $494 million, or $0.58 per diluted share.
Cash provided by operating activities increased to $194 million. The quarter’s capital expenditure of $58 million was largely associated with Deepwater Aquila. The company’s CEO, Jeremy Thigpen, affirmed the strong demand for its high-specification rigs, with a backlog of nearly $1.3 billion booked in the third quarter. With a backlog of $9.3 billion, Thigpen stated that the company will continue to maximize cash generation to improve the balance sheet.
Value with Upside Potential
The stock has been on a downward trend, shedding over 21% in the past year. It trades near the low end of its 52-week price range of $3.40 – $6.88 and demonstrates ongoing negative price momentum as it trades below major moving averages. Yet, the slide in price has pushed the stock into relative value territory as its P/S ratio of 0.98x sits below the Energy sector average of 1.34x.
Analysts following the company have taken a cautious stance on the stock. For example, Evercore ISI recently downgraded the stock to In Line from Outperform with a price target of $5, down from $6, noting anticipation of flat demand leading to a cautious spending outlook for 2025.
Seven analysts recently recommended that Transocean be rated a Hold overall. The average price target for RIG stock is $4.92, representing a potential upside of 29.82% from current levels.
RIG Stock in Review
Transocean has secured a significant four-well option with Reliance Industries, adding to its hefty $9.3 billion backlog. However, mounting industry challenges and reduced global oilfield services activity led to a net loss in the most recent quarter, triggering a downgrade in ratings from Wall Street analysts. Despite these difficulties, potential changes in the oil and gas industry under the Trump administration could offer an optimistic turn of events for investors keeping tabs on the fossil fuel sector.
