Why Transocean's Long-Term Outlook Is Full of Uncertainty

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Part 2
Why Transocean's Long-Term Outlook Is Full of Uncertainty PART 2 OF 8

What Does RIG’s Management Think about Its Outlook?

What does RIG’s CEO think?

Transocean’s (RIG) management expects the energy market uncertainty to continue to affect the company in the next one to two years. In the 3Q15 press release, Jeremy Thigpen, RIG’s chief executive officer, said, “As we look forward into the next 12 to 24 months, we expect that the conditions will continue to be challenging for offshore drilling companies. However, our customers remain committed to their offshore properties and the future production that they represent. The currently depressed oil and gas price environment has stymied investment in the near term, but the need for future reserve replacement remains critical.”

What Does RIG’s Management Think about Its Outlook?

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As of 3Q15, RIG identified 22 floaters to scrap given the weakness in the energy drilling market. In its fiscal 2016, Mark Mey, RIG’s chief financial officer, said, “We expect our G&A expenses in 2016 to decline to approximately $165 million, again reflective of the results of our restructuring. Capital expenditures in 2016 are anticipated to be approximately $1.4 billion, including $1.16 billion for the newbuilds, $170 million for capitalized interest. Maintenance CapEx is expected to be between $90 million and $120 million. This reduced level of maintenance capital expenditures is aligned with our other service-day estimates and consistent with a smaller but younger fleet of operating rigs.”

Analyst targets for RIG

Due the unpredictability of energy price recovery, Wall Street analysts’ opinions show limited upside potential about RIG’s target prices in the next 12 months. While the highest target price for RIG is $19, the lowest is $4.5. The median target price for RIG is ~$12. RIG is currently trading at ~$13, implying a 9% downside at its median price. Ensco (ESV), RIG’s lower market cap peer in the oilfield equipment and service industry, received a $16.0 median target price. This, relative to its current price of $16.3, implies a 2% downside. RIG makes up 0.36% of the Energy Select Sector SPDR ETF (XLE).

Next, we will discuss RIG’s revenue and earnings according to segment.


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