Offshore drilling is not as lucrative as it once was, thanks in part to the continued decline of oil prices, but also due to new federal regulations in the works designed to prevent a repeat of the 2010 Gulf of Mexico oil spill. These market conditions will be extra tough for offshore drilling service providers like Transocean (RIG).
Transocean shares are down 7.7% on heavy volume in trading on Tuesday, continuing the company's 27% year-to-date decline.
Analysts at both Morgan Stanley and Raymond James commented on the offshore drilling industry recently, with the former predicting a "prolonged offshore rig market downturn." While Morgan Stanley does say there are some plays in the sector that are attractive, Transocean is not one of them.
"Recalibrating for a weaker oil price outlook: We now anticipate a prolonged offshore rig market downturn, with a 2018 uptick at the earliest, as offshore will likely lag even in an oilfield-services recovery. Meanwhile, balance sheets have become a primary driver of stock performance," Morgan Stanley's Ole Slorer and Jacob Ng wrote.
While analysts at Morgan Stanley focused on the company's balance sheet, analysts at Raymond James are more focused on the company's debt load.
"We reiterate our stance to stay underweight the offshore drillers in general. However, we note that as we expect oil prices to recover going into 2H16 and 2017, the stocks could likely follow crude and we could have significant rallies (particularly given the high short interest); that said, we believe oil prices would need to be materially higher than we are expecting to alleviate the fundamental challenges facing the subsector. Offshore drillers with stronger balance sheets and high levels of contract coverage remain relatively more defensive than their more levered and exposed peers," said Raymond James analyst Praveen Narra.
Also today, analysts at Barclays set a $6 price target on Transocean's shares, a potential 37% decline from today's open, while also maintaining an "underweight" rating for the company.
Transocean's cash assets declined to $28.4 billion in 2014 from $34.2 billion in 2012. However, the company has also been active in limiting its liability over the same period, reducing its total liabilities to $14.4 billion from $18.5 billion.
Separately, TheStreet Ratings has a Sell rating on the company with a D+. TheStreet identified several weaknesses with the company including the stock's recent decline and weak operating cash flow.
With analysts not expecting oil prices to fully recover for at least a couple more years, the chances that Transocean will be able to stay afloat are dwindling.
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