Deep-sea drilling specialist Transocean Ltd. (NYSE:RIG) jumped 15.2% in September, according to data provided by S&P Global Market Intelligence. There have been a couple of big ups and downs this year, but through the first nine months of 2018, the stock was up a heady 30%. The timing of the September advance, however, coincided with some key news.
On Sept. 4, Transocean announced that it had agreed to buy Ocean Rig in a cash and stock transaction valued at $2.7 billion, including debt. Ocean Rig's fleet consists of nine ultra-deepwater drillships and two semisubmersibles, all of which are designed to work in harsh condition. It also has two drillships under construction. The combined fleet will have 57 vessels and increase Transocean's backlog by 6%.
The timing of this deal seems very good for Transocean. As CEO Jeremy Thigpen noted in the release, "The combination of constructive and stable oil prices over the last several quarters, streamlined offshore project costs, and undeniable reserve replacement challenges has driven a material increase in offshore contracting activity." Transocean, in fact, has inked both an extension and a new contract since it announced the acquisition. The CEO believes that an industry upturn is imminent, which suggests that Transocean is getting bigger just in time to benefit from rising oil prices.
That said, the last few years have been rough for Transocean shareholders. The oil downturn that started in mid-2014 led to a material downturn in demand for the company's fleet and a spate of asset write downs and ship retirements. The stock remains more than 60% below its level in mid-2014. And the fleet tinkering isn't done yet. Earlier this year, for example, the company took a $1 billion charge because it was scrapping more ships. Fellow Fool Tyler Crowe believes there could be even more retirements and asset writedowns to come as well. So while an industry upturn would benefit the company greatly, investors still need to be prepared for some potentially big one-time charges in the future.
It appears that the news surrounding Transocean is getting definitively better. The Ocean Rig acquisition only improves the outlook, assuming that oil prices cooperate by staying at recent levels or, better yet, moving higher. Investors looking for a way to play an improving oil market should consider a deep dive here. However, the cyclical nature of the industry should keep more conservative types away, particularly since the impact of the last downturn may still be working through Transocean's fleet.