Transocean Ltd. (NYSE:RIG) is on the verge of a crucial moment as their contracted dayrates have surpassed the $500k/d mark, with the Atlas rig being contracted out at $505k/d. Despite this positive development, the effort to bring the rest of the fleet up to speed seems to be slowing down, with dayrates for ultra-deepwater floaters decreasing by -2% to $422,900/d in Q1 ’24 from $432,100 in Q4 ’23. However, despite this setback, dayrates for the floaters are still up 17% year-over-year. Due to operational challenges, the need for financing, declining backlog, and delayed project starts, I continue to recommend selling RIG with a price target of $4.28/share at 10.30x eFY25 EV/aEBITDA.
There is a lag effect between elevated day rates, oil prices, and the backlog during an oil bear market. While oil prices are expected to remain stable, it is important to consider this factor when valuing the firm’s projected dayrates as rates may be adjusted in times of stress. Transocean is experiencing three quarters of sequential decline in their total contracted backlog, which goes against the market trend of increased focus on offshore and deepwater drilling. Producers may be delaying project starts due to the current oil prices, leading to a wait-and-see approach.
Looking ahead to eQ2 ’24, Transocean anticipates contract drilling revenue of $866mm with a fleet-wide revenue efficiency rate of 96.5%. Operational potential is expected to increase as average dayrates rise and demand for offshore production grows. However, the firm’s debt position may pose challenges if rig demand decreases. Risks include a bearish oil market and a potential drop in global demand. Until Transocean addresses their financial risks, investing in RIG shares may be risky.
Transocean shares are currently trading at 16.02x EV/aEBITDA, posing a risk to equity value due to high leverage. Based on historical valuation metrics, I recommend selling RIG shares with a price target of $4.28/share at 10.30x eFY25 EV/aEBITDA. Shares are considered overpriced at the current valuation.
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