What happened
Shares of offshore oil driller Transocean (RIG -2.20%) are up 10.2% as of 1:15 p.m. EDT today. While there is no specific news behind today's move, the stock surge appears to be tied to rising oil prices and a broader stock market increase.
So what
Any time Transocean's stock rises on oil prices alone, investors should be a little skeptical. That's because Transocean's business has little to do with the price of oil on any given day. The company's business relies on producers having high enough prices over a sustained period of time to justify spending capital on offshore developments.
Image source: Getty Images.
For much of the past few years, oil prices haven't been high enough to justify exorbitant offshore budgets, and as a result, Transocean and its peers have had to make massive cuts to their business by retiring several rigs.
After Transocean's better-than-expected second-quarter earnings result, and with a stock price that has been absolutely decimated over the past several years, it doesn't really take that much to move this stock multiple percentage points in a single day.
Now what
Today's stock price may turn some heads, but there wasn't any new information that would have changed the investment thesis on this stock. Transocean's fate is still very much tied to the spending plans of oil and gas producers. After oil prices collapsed back in 2014 and 2015, the prevailing theory was that the decline in spending on new resources would eventually lead to a subsequent spending surge.
That has yet to happen, though, as shale drilling in the U.S. has grown faster than most analysts envisioned and filled any incremental demand while also taking global market share.
There is some offshore spending right now, but the levels remain relatively low compared to before 2014. It's possible that we'll get back to those levels of spending again, but shale drilling makes it harder to predict how long that will take.
The good news in all of this is that Transocean remains in relatively good financial shape with a large fleet of technologically advanced rigs. The company has compelling rigs for producers to do their exploratory and development drilling. The only question for investors is how long they are willing to wait for that to actually materialize.
