Shares of offshore drilling rig operator Transocean (RIG -0.95%) were rocketing higher today, up 7.4% as of 2:30 p.m. ET.
Transocean reported earnings last night, and by the looks of it, one wouldn't have thought that the stock would be up today. Revenue declined 10.3% year over year, missing expectations, and a non-GAAP (adjusted) loss per share of $0.28 also missed expectations.
So why is Transocean rising today? Looking across the entire energy sector, a lot of oil-related companies are much higher today, as Transocean wasn't the only company in the sector to report earnings. It appears that the generally positive tone across the industry, as well as commentary on Transocean's conference call, is spurring optimism that investment in deepwater drilling will rise amid ongoing high oil prices.
On the conference call with analysts, Transocean CEO Jeremy Thigpen said:
Worldwide committed drillship utilization currently exceeds 90%. Many of these high-specification assets are concentrated in the U.S. Gulf of Mexico, where we continue to observe the most significant growth in day rates, from the low $200,000s just a few years ago to over $300,000 per day for recently announced fixtures. It is very possible we will see awards in the near future at day rates above $400,000 per day, which reflects the increasing tightening of this nearly already sold-out market.
The Gulf of Mexico is usually a leading indicator for the industry, so to see offshore rig operators able to raise prices there is a positive sign. Part of the reason oil prices are so high, and now benefiting the oil drillers, is that they have held back on exploration and development budgets over the past decade of low prices, largely thanks to the onshore U.S. shale boom.
However, now that shale drillers have found discipline, and amid the unexpected war in Ukraine, $100-plus oil appears to finally be bringing back investment to offshore drillers, which can now raise day rates. This will hopefully lead to Transocean being able to turn a profit in the near future.
Unlike the oil drillers now benefiting from the high price of oil, Transocean remains far below levels seen just a few years ago. At just $4 per share and a $2.8 billion market cap, Transocean is worth just a fraction of its value 15 years ago, before the financial crisis and shale boom, when its price ultimately reached a high in the $160 range in 2007.
That being said, Transocean's capital structure is a cause for concern, as the company has more than $7 billion in debt, and it's still not profitable on a net income basis under generally accepted accounting principles.
That debt load and compressed valuation means Transocean could go up multiples of its current price if oil stays in the $100 range for a long period, and offshore drilling investment reaccelerates. However, the stock is also very risky, should oil prices come down and offshore drilling remain tepid. For those looking to bet on the energy sector, I still think the safest plays are the drillers currently benefiting from high oil prices, and which are currently paying out dividends and repurchases, not the services companies still looking to get back to profitability.
That being said, for those looking for riskier, higher-upside bets, a leveraged service provider like Transocean may be interesting; just keep the bet at a reasonable allocation in your portfolio.