Is It Worth Holding Transocean (RIG) As Oil Rout Continues?

We issued an updated research report on Transocean Ltd. (NYSE:RIG) on Sep 14, 2016. The company is one of the world's largest offshore drilling companies with a technologically advanced and versatile fleet. However, the ongoing oil price weakness is hurting the company’s business.

Transocean’s current Zacks Rank #3 (Hold) implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

With less oil being discovered on land and companies having to dig ever deeper to get to their reserves, Transocean should benefit from a market with robust multi-year demand trends, given its technologically advanced and versatile drilling fleet. In particular, Transocean is the industry leader in deep sea drilling. The company’s state-of-the-art mobile offshore drilling fleet worldwide can function in the most challenging environments, such as the North Sea.

Moreover, Transocean’s strong backlog, which now stands at an industry-leading $13.7 billion, not only reflects steady demand from its customers but also offers an unmatched level of earnings and cash flow visibility. This enables Transocean to navigate the current uncertain environment better than many of its peers.

However, we expect Transocean shares to remain soft until oil prices rebound sufficiently as deepwater/ultra-deepwater drilling – with its associated risks and steep costs – require a far higher oil price than what is prevailing currently.

As per the recent reports of The Organization of the Petroleum Exporting Countries (OPEC) and The International Energy Agency (IEA), the crude market will remain oversupplied through 2017. Hence, the future of the company is also looming in uncertainty as there might be lesser drilling activities till then.

Zacks Rank and Stocks to Consider

Better-ranked players in the energy sector include China Petroleum & Chemical Corp. (NYSE:SNP) , Enbridge Inc. (NYSE:ENB) and NGL Energy Partners LP (NYSE:NGL) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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