Please ensure Javascript is enabled for purposes of website accessibility

Investors' Fears of More Pain Sent Shares of Transocean Tumbling in January

By Tyler Crowe - Feb 10, 2016 at 8:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Another month of low oil prices simply translates to an even longer period before Transocean's business picks back up again.

What: Shares of Transocean (RIG -0.29%) declined 15.8% in January as more and more signs point to an extended slump in drilling activity.

So what: With each passing day in this oil and gas market, the negotiating power for new rigs moves into the hands of the producers that contract the rigs. Low oil prices mean they can push cost savings onto their contractors to make up for the loss of revenue. At the same time, the oversupply of rigs on the market today also means that contractors such as Transocean will fight tooth and nail to get one of the few contracts up for grabs right now. For 18 months now, this has been the case against Transocean, and it doesn't appear that this situation will improve any time soon.

RIG Chart

RIG data by YCharts

According to most oil services executives whose companies have already reported earnings, they aren't expecting prices for oil to improve until at least the second half of 2016, and even when they do, it will take a while before companies get the appetite to go out and drill for new oil sources. Then there's the fact that there are too many rigs on the market that lead to lower contract rates. Until all of these issues clear, Transocean and its peers will continue to struggle. 

Now what: Transocean has done a commendable job handling the downturn thus far. It has quickly moved to scrap many of its older rigs that are at or near the end of their service life to concentrate its sales efforts on its newest, higher-specification rigs. At the same time, it has shed close to $7 billion in liabilities over the past three years to shore up the balance sheet. As more and more of its older fleet rolls off contract, don't be surprised if we see the company scrap those ones as well. 

Investors looking at Transocean might be tempted by the fact that its shares are down more than 80% over the past two years, but considering the amount of headwinds still facing the offshore rig industry, there's no rush to go out and buy shares of Transocean today. It's probably best to simply watch from the sidelines to see how Transocean handles the remnants of its legacy fleet, its remaining rigs under construction, and its debt levels. 

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com or on Twitter @TylerCroweFool.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$3.47 (-0.29%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.