Headquartered in Vernier, Switzerland, Transocean Ltd. (RIG) is one of the world’s largest global offshore contract oil and gas drilling companies. The company operates the highest specification floating offshore drilling fleet in the world, with 37 offshore drilling units, including 27 ultra-deepwater floaters and 10 harsh environment floaters. It is currently constructing two ultra-deepwater drill ships.

RIG’s shares have been gaining momentum lately thanks to surging oil prices last week. In the wake of Russia’s invasion of Ukraine, which has resulted in oil import embargoes on the largest non-OPEC oil exporter, crude oil prices touched their highest levels since 2008 last week. The bullish market trends caused RIG shares to gain 14.4% over the past month and 50% year-to-date.

However, the scenario has changed dramatically this week. Rising COVID-19 cases and consequent lockdowns in China, the potential lifting of oil export sanctions on Iran, and talks between Russia and Ukraine have raised concerns regarding plummeting oil demand amid easing supply, causing crude oil prices to fall sharply since yesterday to hit their lowest levels since February 25. As a result, shares of RIG have plummeted 18.4% in price over the past five days to close yesterday’s trading session at $4.14.

Here is what could shape RIG’s performance in the near term:

Poor Growth Prospects

The $604.33 million consensus revenue estimate for its fiscal year 2022 first quarter (ending March) indicates a 7.5% decline year-over-year. The Street expects the company’s revenue to slump 2.5% from the same period last year to $639.58 million in its fiscal second quarter (ending June).

Analysts expect RIG’s EPS to remain negative until at least fiscal 2023 (ending December 2023). Furthermore, the company’s loss per share is expected to worsen 30.6% year-over-year to $0.25 in the current quarter.

Also, RIG missed the consensus revenue and EPS estimates in each of the trailing four quarters.

Negative Profit Margins

RIG’s negative 1.25% trailing-12-month EBIT margin compares with the 11.38% industry average. In addition, the company’s negative 23.16% trailing-12-month net income margin is significantly lower than the 6.61% industry average.

RIG’s negative 5.23%, 0.1%, and 2.86%  respective trailing-12-month ROE, ROTC, and ROA compare with the 8.9%, 4.42%, and 2.92% industry averages, respectively. Also, the company’s 34.08% trailing-12-month gross profit margin is 19.8% lower than the 42.47%  industry average.

POWR Ratings Reflect Bleak Prospects

RIG has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

RIG has a D grade for Stability and Growth and an F for Sentiment. The stock’s 3.05 beta justifies the Stability grade. In addition, RIG’s revenues have slumped at a rate of 5.4% per annum over the past three years, which explains its Growth grade. Furthermore, analysts expect the company’s EPS to remain negative until at least next year, in sync with the Sentiment grade.

Among the 14 stocks in the F-rated Energy - Drilling industry, RIG is ranked #11.

Beyond what I have stated above, view RIG ratings for Momentum, Quality, and Value here.

Bottom Line

Investors expect the increased oil prices to boost the demand for RIG’s offshore drilling services, thereby improving its revenues and profit margins. However, the recent slump in oil prices has quashed investors’ hopes, as evidenced by the stock’s sharp price plunge over the past few days. Also, analysts expect the company’s revenue and EPS to decline year-over-year in the current quarter. Thus, we think RIG is best avoided now.

How Does Transocean (RIG) Stack Up Against its Peers?

While RIG has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, SandRidge Energy, Inc. (SD) and Whiting Petroleum Corp. (WLL), which have a B (Buy) rating.

Note that SD is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

RIG shares were trading at $4.10 per share on Tuesday afternoon, down $0.04 (-0.97%). Year-to-date, RIG has gained 48.55%, versus a -10.74% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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