(Idea) Transocean - Oof

We initially became interested in Transocean (RIG) when it became clear that global demand for offshore rigs was set to increase while the supply of rigs would be constrained over at least the next few years. These factors would push dayrates sustainably above $500,000, boosting the company’s cash flows.

The macro part of our thesis is playing out as expected. Dayrates have indeed increased significantly in recent quarters. Dayrates of $500,000 for high-spec deepwater rigs are being seen more often than not. Transocean’s latest contract wins have featured day rates in excess of $500,000. The trend is undeniably positive, as shown in the graphic below.

Source: Transocean Investor Presentation, Sept. 4, 2024.

Despite the bullish macro trends, Transocean’s financial performance has failed to meet our expectations. Moreover, its shares now face the risk of deteriorating macro conditions.

Only a continued rise in high-spec deepwater rig dayrates that drives a sustained increase in Transocean’s free cash flow will see the bullish case for its shares come to fruition. The company can then reduce leverage and eventually distribute free cash flow to its shareholders. To the extent that scenario becomes less likely, Transocean shareholders are at risk.

While we still believe there’s long-term upside in the shares from today’s price of $4.20, the risks loom larger in the picture. Current Transocean holders could do well over the next few years with a small weighting in the shares, but investors looking to commit new funds to oilfield services should look elsewhere.