On Monday, JPMorgan maintained its Underweight rating on Transocean (NYSE:RIG), a major player in offshore drilling. The firm pointed to industry concerns over calendar white space and potential earnings risks as reasons for the cautious stance. Transocean has been actively managing these challenges by implementing gap-filler programs, such as the 40-day extension for the Deepwater Invictus, which was discussed during the company's second-quarter earnings call.
Despite the broader industry concerns, Transocean is considered relatively sheltered from these risks, as the company has secured contracts for the majority of its active floater fleet for the second half of 2024 and into 2025. However, two high-spec drillships, the Deepwater Conqueror and Deepwater Mykonos, are set to roll off contract in 2025. Transocean has indicated promising prospects for the Deepwater Conqueror post its contract with Chevron (NYSE:CVX) in April 2025, and the Deepwater Mykonos is anticipated to remain active in offshore Brazil after its contract with Petrobras concludes in October 2025.
JPMorgan forecasts Transocean's third-quarter EBITDA to fall short of consensus estimates at $278 million, which aligns with the company's guidance. Additionally, on September 10, Transocean announced a significant one-year, $232 million contract for the Deepwater Atlas (NYSE:ATCO) with BP (NYSE:BP), with a day rate of $636,000. The firm also anticipates Transocean to recognize $638 million in non-cash impairment costs related to the sale of the Development Driller III and Discoverer Inspiration, with the proceeds earmarked for debt reduction after the expected transaction close in the fourth quarter of 2024.
For the fourth quarter of 2024, EBITDA is projected at $342 million, slightly below the Street's estimate. JPMorgan's full-year EBITDA forecast for 2024 is $1.10 billion, trailing the Street's estimate by 1.0%. Looking ahead to 2025, the firm expects a significant increase in cash flow as capital expenditures decrease to maintenance levels, aiding Transocean's deleveraging efforts. The final tranche of capital expenditures for the Deepwater Aquila newbuild will occur in the fourth quarter of 2024, with no further newbuilds or reactivations planned.
JPMorgan has revised its EBITDA estimates for 2024 and 2025 to $1,102 million and $1,402 million, respectively, from previous estimates of $1,116 million and $1,559 million. These revised figures represent a decrease of 1.0% and 7.1% compared to consensus estimates. The firm also forecasts free cash flow of $129 million for 2024 and $806 million for 2025. The reiteration of the Underweight rating is largely based on valuation, with Transocean's shares trading at 8.8 times and 6.9 times JPMorgan's 2024-25 EV/EBITDA estimates.
In other recent news, Transocean has been subject to several significant developments. The company's stock was downgraded from a Buy to a Neutral position due to a revised forecast methodology, which anticipates potential declines in the company's EBITDA expectations for 2025. Despite this, Transocean has secured a significant contract with bp for operations in the U.S. Gulf of Mexico, adding approximately $232 million to the company's backlog.
Transocean also secured a contract valued at approximately $123 million with Reliance Industries Limited for drilling six wells offshore India, set to begin in 2026. The company's Q2 2024 results showed an adjusted EBITDA of $284 million and contract drilling revenues of $861 million, despite a net loss of $123 million for the quarter.
Transocean further announced amendments to its Organizational Regulations, merging the Health, Safety, Environment & Sustainability Committee with the Corporate Governance Committee to form the new Governance, Safety & Environment Committee, aiming to enhance operational efficiency.
InvestingPro Insights
Transocean's financial landscape, as revealed by InvestingPro data, provides additional context to JPMorgan's cautious stance. The company's market capitalization stands at $3.76 billion, with a price-to-book ratio of 0.35, indicating that the stock may be undervalued relative to its assets. This aligns with one of the InvestingPro Tips, which notes that Transocean is "trading at a low Price / Book multiple."
Despite revenue growth of 15.07% over the last twelve months, Transocean faces profitability challenges. The company's negative P/E ratio of -11.08 and operating income of -$1 million underscore the financial hurdles mentioned in the article. These figures support another InvestingPro Tip that states Transocean is "not profitable over the last twelve months."
The volatility in Transocean's stock price, as highlighted by InvestingPro, is evident in its price performance. With a one-year price total return of -44.23% and currently trading at 55.77% of its 52-week high, the stock's movements reflect the industry concerns and earnings risks discussed in the JPMorgan analysis.
For investors seeking a more comprehensive understanding of Transocean's financial position, InvestingPro offers 6 additional tips, providing a deeper dive into the company's prospects and challenges in the offshore drilling sector.
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