The first quarter of the most important earnings season of the year is in full steam right now, giving investors a direct insight into the momentum that some of the best and biggest companies in the market can count on through their underlying financials. Today’s focus seems to be going to the energy sector after a few important factors developed in the space to draw attention.

One of these factors is how Warren Buffett is now positioned to own over 29% of Occidental Petroleum Co. (NYSE: OXY), as well as how analysts at Goldman Sachs recommended oil as one of the commodities to break out this year within their 2025 macro outlook report. More than that, Paul Tudor Jones made it a point to buy oil as he mentioned how cheap it is today during a recent CNBC interview.

However, not all energy stocks are made equal; some of them are higher up in the sector’s value chain and can have first dibs on the earnings and value that will be created from higher oil prices. One such name can be found in shares of Transocean Ltd. (NYSE: RIG), as a drilling equipment manufacturer and provider, this company is positioned to get paid before anyone else in the sector when demand starts to pick up.

Transocean's Recent Earnings Show More Upside Ahead

During the quarterly earnings release, the company’s CEO announced that up to $2.4 billion in additional backlog was secured during 2024, which adds to the $8.6 billion in total backlog already accumulated at Transocean. Considering that most of this backlog translates into revenue over two to three years, the price-to-sales (P/S) ratio looks very cheap.

More than that, the company’s management also stated that they are entering the year with industry-leading contract coverage well into 2026, basically meaning they expect to close even more contracts during the coming quarters and add value to the company’s bottom-line earnings. The end result of a great quarter can be seen in one of the most important financial metrics investors should cover in a manufacturing stock like this one.

That metric is free cash flow (operating cash flow minus capital expenditures), which came in at just under $200 million for Transocean during this period. This is a massive improvement from a net outflow of over $300 million a year prior. Positive free cash flow could point to improvements in the underlying industry trends.

This theme can be seen through the 1.5% outperformance delivered by the Energy Select Sector SPDR Fund (NYSEARCA: XLE) compared to the broader S&P 500 over the past week alone. While not something that locks in the future of the sector, it could be the beginning of a much bigger theme happening in the economy right now.

Fundamentals Justify Wall Street Bullishness

Right now, the economic agenda is to boost domestic production through more jobs and output, which the new implementation of trade tariffs could exacerbate. Whatever comes out of these new policies, there is one common characteristic that can help oil prices: production and trade activity.

If breakouts are coming in the form of these two new factors, oil is the commodity that businesses and consumers will need to rely on in order to respond to quick shifts in the economy. This underlying tailwind could be the reason behind the $5.94 per share consensus price target placed on Transocean stock today.

This valuation would call for up to 74% upside from today’s low price, representing only 51% of Transocean stock’s 52-week high level. With this setup, investors could safely assume that some of the worst has already been priced into the stock, leaving them with all the upside in return, otherwise known as a fantastic risk-to-reward setup.

Justifying the views behind Transocean’s valuation is the current earnings per share (EPS) forecast laid out by analysts as well, who shoot for up to $0.07 in earnings by the fourth quarter this year, a significant boost from today’s net loss per share of $0.09. Since EPS growth typically drives stock prices, there is more than enough evidence to show a double-digit rally in Transocean.

Others on Wall Street agree with this dynamic, such as the Vanguard Group, which, as of February 2024, decided to boost its holdings in Transocean by as much as 1.2% to bring it into a net position of $295.5 million today, or 8.9% ownership in the company.

With bullish tailwinds building up at the top of the energy sector’s value chain, it’s only a matter of time before other names in the production and refining stage see the benefits as well, where the broader ETF and Buffett’s pick in Occidental Petroleum will likely break out as well.

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