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Transocean (RIG) Stock Up 15% on Offshore Drilling Contract

Zacks Equity Research
Updated

Offshore drilling giant, Transocean Ltd. RIG has outbid its competitors for an offshore development in India at a time when drillers are facing rig contract terminations. The contract primarily helped Transocean to surge almost 15% on the NYSE.  

In detail, Transocean has entered into a 730-day contract with Oil and Natural Gas Corporation Limited (ONGC) for one semi-submersible rig that will likely be operating at a dayrate of $127,000. Notably, ONGC is the largest oil and natural gas exploration and production player in India.

Importantly, the dayrate that Transocean is offering is much low but still better than keeping the rig idle. Analysts are expecting such a low rig rate to likely hurt Transocean’s earnings in the coming quarters.

Investors should also note that a rally in oil price has helped the Transocean stock to rise. West Texas Intermediate (WTI) crude closed at $49.69 a barrel yesterday, the highest mark since Jul 21, 2015. Disruption in supply from Canada and Nigeria, a weak dollar and the lower probability of a Federal Reserve rate hike in the near term led to the outperformance of crude.

Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. The company offers unmatched levels of earnings and cash flow visibility, given its technologically advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power.

However, we expect Transocean shares to remain soft until oil prices rebound. Although oil is walking in the bullish path, it is still way below the mid-2014 level.

Transocean carries a Zacks Rank #3 (Hold), implying that it will perform in line with the broader U.S. equity market over the next one to three months.

Some better-ranked players in the same space are Independence Contract Drilling, Inc. ICD, North Atlantic Drilling Limited NADL and Hercules Offshore Inc. HERO. Independence Contract and North Atlantic Drilling sport a Zacks Rank #1 (Strong Buy) while Hercules Offshore carries a Zacks Rank #2 (Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
HERCULES OFFSHR (HERO): Free Stock Analysis Report
 
NORTH ATL DRILG (NADL): Free Stock Analysis Report
 
INDEPENDC CONTR (ICD): Free Stock Analysis Report
 
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