The Investment Thesis


Energy has been the greatest-performing industry in recent years, and the offshore component appears to be late to the party, and Transocean is trying to fix it.

Transocean’s backlog rose fast in the second half of 2022, as day rates continued to rise. Transocean has a significant amount of debt on its balance sheet, which raises the risk but also raises the potential profit for investors over the next few years.

The corporation conducted debt offers in January to enhance its financial condition, and the company is primed for a solid run in the next years.

If things go as I expect in the offshore industry, Transocean could easily surpass $10 per share in 2023 and potentially higher in future years.

Debt Refinancing and an Expanding Backlogs

Transocean had two distinct debt offers in January. The first issue was priced in early January for $525 million at an interest rate of 8.375%, with a maturity date of 2028. The debt is a secured issue, with the funds going to Deepwater Titan’s activities.

The
second offering was much larger, totaling $1.175 billion. It bears an interest rate of 8.75% and the profits will be utilized to repay four rig-secured notes.

The interest rate is higher than the previous debt, but the maturity date is pushed back to 2030.

Three of the existing bond offerings mature in 2024, with the final maturing in 2025.

I’m interested to see what happens with the company’s debt level over the next year, but I believe things are improving for the company.

Positive changes can also be seen in the company’s backlog, which climbed considerably at the end of 2022.

While the extremely leveraged balance sheet is cause for concern, the quickly expanding backlog leads me to believe the company is in good shape for the next few years.

The majority of Transocean’s fleet will be repriced by the end of 2023, resulting in higher day rates and considerable cash flows.

The backlog stood at $8.3 billion at the start of the year. They announced numerous new contracts a few weeks ago, adding about $500 million to the backlog.

Valuation

The valuation is not as straightforward as it would be for a REIT or a stable corporation with continuous earnings.

Listening to the podcast was essential in convincing me that Transocean is undervalued.

The guest, Judd Arnold, estimated the cost of a huge new rig equivalent to what Transocean has at $1 billion (on the low end), and the industry as a whole isn’t building any new ones right now.

He also expects day rates to rise dramatically as utilization rises, with nearly all of the additional revenue going directly to the bottom line.

This isn’t going to be a precise computation in which I tell you how undervalued Transocean is. What I can say is that, despite Transocean’s debt-laden financial sheet, I believe shares will trade over $10 in the next twelve months, and maybe considerably higher.

The assets they have are irreplaceable, and even if fresh drill ship supply comes online, it will take at least three years to develop new ones.

Conclusion

Transocean shares have risen about 80% in the previous year and nearly 40% since the beginning of 2023, making it difficult for investors to purchase them.

Despite the expected continuation of short-term volatility, I believe the rise has legs for a long-term investor with a one to three-year time horizon.

The corporation’s balance sheet, which has an undeniably hefty debt load, is improving as the company has issued debt beginning in 2023 to extend numerous approaching maturities.

After significantly expanding in the second part of 2022, the backlog has continued to grow in 2023.

The valuation is difficult to pin down, but I believe that if you look at where the puck is likely to go for the industry with day rates, buying Transocean at a $4.1B market cap is a slam dunk.

I intend to defer my calls until late in the year since I believe the rally is just getting started.

I’m actually thinking about increasing to the position and have been looking closely at the January 2025 calls, which I would nibble on if shares fall in the next weeks.

I also intend to investigate Tidewater in the coming days, since I believe many of the same reasons to be positive on Transocean apply to Tidewater.

Transocean may be a suitable choice for those looking to acquire a stake with some speculative upside for 2023.

For More Stocks And Investment Related News, Click Here.

 

 

On this website we use first or third-party tools that store small files (cookie) on your device. Cookies are normally used to allow the site to run properly (technical cookies), to generate navigation usage reports (statistics cookies) and to suitable advertise our services/products (profiling cookies). We can directly use technical cookies, but you have the right to choose whether or not to enable statistical and profiling cookies. Enabling these cookies, you help us to offer you a better experience.