We are maintaining our Neutral recommendation on Transocean, Inc. (RIG) with a target price of $85.
We like Transocean’s sizeable fleet of deep and ultra deepwater offshore drilling rigs, large contract revenue backlog that provides an unmatched level of cash flow visibility, impressive track record of generating free cash flow throughout the inherently volatile contract drilling cycle, and the continued strengthening of its credit profile through debt reduction.
While near-term headwinds remain, the long-term outlook for offshore drilling, particularly the deepwater end of it remains favorable. With the majority of Transocean’s high specification fleet contracted till 2011 and beyond, we believe the company is in an excellent position to navigate the current uncertain environment. We also welcome Transocean’s recent decision to return cash to shareholders through dividend and share repurchases.
However, continued domestic dayrate softness, an uncertain global economic outlook and still volatile commodity prices are likely to squeeze Transocean’s profits over the next few quarters. Considering these factors, we do not anticipate a significant upside and expect Transocean to perform in line with the broader market.
Switzerland-based Transocean, Inc., with the very appropriate NYSE ticker of RIG, is the world’s largest offshore drilling contractor and the leading provider of drilling management services worldwide. As of Feb 2, 2010, the company owned, had partial ownership interests in, or operated 138 mobile offshore drilling rigs.
Transocean’s drilling fleet consists of 44 high-specification deepwater floaters, 26 mid-water floaters, 10 high specification jackups, 55 standard jackups, and 3 other rigs. Additionally, the company had 5 ultra-deepwater floaters under construction.
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