Why Transocean Is Poised to Pull Back

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Transocean (NYSE: RIG  ) slipped 1% this morning after Goldman Sachs downgraded the drilling giant from "neutral" to "sell".

So what: Along with the downgrade, analyst Waqar Syed lowered his price target to $50 (from $53), pretty much exactly where the stock closed on Friday. While momentum traders might be attracted to Transocean's recent pop -- fueled by its addition to the S&P 500 Index -- Syed believes that the rally is particularly unsustainable due to the unfavorable industry trends working against the company.

Now what: Goldman sees significant headwinds in Transocean's near and long-term future. "The key catalyst for offshore drillers is increases in dayrates, and rates have flattened for UDW (ultra-deepwater) rigs while early signs of utilization/dayrate weakness in the deepwater market are emerging," noted Goldman. "RIG faces structural challenges as its floater fleet is aging and it needs to make sizable investments to high grade its fleet. It has taken some recent steps in that regard, but needs to do more." When you couple those risks with the stock's seemingly steep P/E of 25 -- a clear premium to peers -- I'd have to agree that Transocean's recent surge is a bit overdone. 

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  • Report this Comment On October 28, 2013, at 2:54 PM, aspiteri wrote:

    S&P rates RIG with 4 stars with a price target of $58.00 (dated October, 2013).

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