Shares of Transocean (RIG 1.12%) sank 12.7% by 3 p.m. EDT on Wednesday. Weighing on the offshore drilling company was an analyst downgrade.
Transocean bucked the broader trend in the energy market today. While shares of most oil-related companies rallied thanks to higher oil prices, its stock sank following a downgrade by RBC Capital. The bank reduced its rating from sector perform to underperform while slashing its price target from $2.50 to $1.50 a share.
Driving the downgrade is RBC Capital's view that Transocean's risk of filing for Chapter 11 bankruptcy has "increased from a possibility to a probability." That's because plunging oil prices over the past few months will undoubtedly cause rig utilization, dayrates, and cash margins to fall during the second half of this year and into 2021. As a result, Transocean will likely be cash flow negative in 2020 and 2021. That's a concern since the company has $4.3 billion of debt maturing over the next two years, which is the largest amount among energy companies with junk-rated credit, according to Moody's. That debt will be hard to refinance given Transocean's deteriorating finances.
Market conditions have become so bad that several of its peers have already hired restructuring advisers and appear on their way to bankruptcy. Just today, Reuters reported that rival Valaris is preparing to start talks with creditors on terms of a possible bankruptcy filing. The company has $6.5 billion of debt weighing it down, including $1.8 billion that matures over the next two years. Meanwhile, fellow offshore drilling company Diamond Offshore recently elected not to make an interest payment. That could set the stage for a bankruptcy filing within the next 30 days.
It's increasingly likely that Transocean won't survive this downturn. Several of its peers appear likely to file for bankruptcy in the coming weeks, which could force Transocean to do the same. That event might wipe out shareholders, which is why investors should steer clear of this stock for now.