Switzerland-based Transocean Ltd. (RIG) is the world's largest offshore drilling contractor and the leading provider of drilling management services worldwide. The company owns, has partial ownership interests in, or operates 137 mobile offshore drilling rigs. Transocean's drilling fleet consists of 47 high-specification deepwater floaters, 25 mid-water floaters, 9 high specification jackups, 53 standard jackups, and 3 other rigs utilized to support offshore drilling activities worldwide. Additionally, the company had one ultra-deepwater drillship and 3 high-specification jackups under construction.
One of the Worst Energy Performers
Transocean has seen its stock price slump more than 40% this year - one of the worst performing energy companies in 2011 - as investors have been selling the scrip for its weak fundamentals and tepid outlook. The disappointing third quarter results and a number of other challenges have added to this bearishness. In fact, shares of the company hit a new 52-week low of $38.21 on Wednesday, December 28. Due to the beaten down stock price, Transocean's yield has been pushed all the way to over 8%.
Transocean recently reported lower-than-expected EPS for the September quarter - 5 cents versus the Zacks Consensus Estimate of 75 cents and the year-ago profit of $1.36 - adversely affected by the decline in utilization rates and high operating costs.
Transocean, whose ultra-deepwater Horizon drilling platform - contracted to British major BP Plc (BP) - sank following a fire and explosion while operating in the U.S. Gulf of Mexico last year, is already struggling with the ensuing uncertainty realted to its liability exposure. The high out-of-service time, together with the rise in net debt/reduction of liquidity associated with the recently completed Aker acquisition, are also near-term setbacks, in our view.
The Swiss offshore driller's recent issuance of new stock - that represents roughly 8% of the company's total outstanding shares - has led to investor skepticism regarding the continuity of the current dividend payout by the company. There are also apprehensions that the share sale would seriously dilute Transocean's earnings.
To add to these woes, Transocean, together with energy behemoth Chevron Corp. (CVX) has been sued by a Brazilian federal prosecutor for R$20 billion ($10.6 billion) in damages following an oil leak 74 miles off the coast of Rio de Janeiro. The civil suit also seeks a court injunction to stop the companies' operations in the country.
Future Remains Bleak
Given these concerns, we expect Transocean to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).
We believe that the multiple challenges faced by Transocean - legal expenses and potential liability due to its involvement in the Gulf of Mexico oil spill, elevated levels of rig idle time and potential penalties associated with the Brazil spill - together with a likely dividend cut, could push the stock even lower.