This article was written by Blair Goldenberg, a Financial Analyst at I Know First, and enrolled in a Masters of Finance at Colorado State University.

Transocean Stock Analysis

Summary

• Background on Transocean (RIG)
• Transocean Stock Analysis
• The OPEC Effect on Oil Prices
• I Know First Transocean Stock Forecast

Background on Transocean

Transocean Ltd. (RIG) is an international provider of offshore contract drilling services for oil and gas wells. The Company’s primary business is to contract its drilling rigs, related equipment and work crews primarily on a day rate basis to drill oil and gas wells. The Company operates through the contract drilling services segment.

Transocean Stock Analysis

Transocean Ltd. (RIG) dropped -0.15% from $13.35 at closing on December 4, 2016. Transocean reported their Q3 earnings on November 2nd, 2016, after which the share price went down 15 times out of last 28 quarters and currently, it doesn’t seem like Q4 will be any different. RIG reports their EPS at $0.25 per share for the next quarter, $0.11 more than analyst estimates at $0.14 per share. Vetr has recently lowered their rating from “strong buy” to “buy” on RIG stock. Other analyst recommendations can be seen from the chart below. Improvements on analyst ratings will inevitably grow due to new contracts on RIG’s drillships and the OPEC deal that is effecting all of the oil companies around the world.

Transocean Proteus Limited, a subsidiary of RIG, announced that they have an offer of senior secured notes that are worth $625 million. Secured Notes are essentially loans that use the borrowers assets as collateral. The collateral can be sold to repay the debt if the borrower defaults on the note. The particular notes borrowed for Proteus have an interest rate of 6.25%. The notes will mature by 2024 and are able to be called in December of 2020. The company will net about $609 million, after fees and discounts (retrieved from Investopedia). Both RIG and Proteus will guarantee the secured notes as well as collateral of their ultra-deepwater drillship called Deepwater Proteus.

Deepwater Proteus has been operating in the Gulf of Mexico since May of 2016, on contract for Royal Dutch Shell. RIG and Shell have a 10-year contract with a daily rental rate of $519,000. In the past, RIG issued another senior note in order to finance one of their other Deepwater drillship’s, the Deepwater Thalassa. The note had an interest rate of 7.75% and would mature in 2024 as well, however, this deal is better for the company.

The OPEC Effect on Oil Prices

Apart from their new contracts that will inevitably strengthen their stance as a company, the OPEC deal that was just accepted last Wednesday, has positively benefited just about every oil company around the world. Specifically, the OPEC deal has also benefited Stone Energy (SGY), Vanguard Natural Resources LLC. (VNR), and Cenovus Energy (CVE). The deal is to reduce oil output by 1.2 million barrels per day from OPEC oil companies. The reduction puts a strain on supply as demands stays the same.

Early December, crude oil rose above $55 per barrel which is a 16-month high for the industry. After the OPEC deal was signed, oil as a commodity has gone up 5%. The rise from two weeks ago is 16% for the United States crude oil and was the largest increase since 2011 where oil rose for only one week in February. Investors raised long-position on oil last week as the oil prices steadily rose. There is also talk of expanding the deal to non-OPEC oil producers, which would increase oil prices even more. The possible cut beyond OPEC on oil would be about 600,000 barrels per day, the cut would total 1.8 million barrels per day. The meeting to discuss the addition to the deal will be held in Vienna on December 10, 2016.

The average cutback for all of 2017 will be about 657,000,000 barrels. This cutback will put a large strain on all industries as everything will inevitably be affected; unless there is a sudden and immense change of oil usage around the world. Green energy heavily benefits from increase in oil prices due to the shift companies as well as ordinary people tend to take when oil rises.

Most of the time, the majority of companies and individuals don’t think about green initiatives until there is a news story about fossil fuels damaging the environment or oil prices rising massively. In this case, oil prices are on a steady rise with the OPEC deal and people are going to search for cheaper and more “green” ways to get around (i.e. electric cars) and power their homes and facilities. There is a high possibility that this new change in oil production will launch green energy even further, making it cheaper and more accessible. If this happens, the OPEC deal will have been counter-effective and oil companies will lose customers all over the world.

Oil companies still have the ability and time to adapt to the shift, as tobacco companies did once the e-cigarette trend grew. In fact, the OPEC deal may have a positive effect on research and development of green energy within the oil industry. The raise in oil price raises funds for new projects, and adapting to the current and continuous trend towards becoming green can be one of the larger projects the oil companies can move towards. The continuous use of fossil fuels can fund the projects until the development is ready to be revealed and used all over the world. This is a chance for the oil companies to shift their operations, gaining appraise from international communities while still being able to turn a profit.

I Know First Transocean Stock Forecast

On December 6, I Know First predicted RIG’s bullish position with 178.32 signal and 0.68 predictability indicators in 1 year forecast.

The stock is up more than 18% since.

How to interpret this diagram:

Signal

This indicator represents the predicted movement/trend of the asset; not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price.

Predictability (P)

This value is obtained by calculating the average correlation coefficient between the past predictions and the actual asset movement for three discrete time periods. The averaging gives more weight to more recent performances. As the machine keeps learning, the values of P generally increase.

Conclusion

While the OPEC deal seems to have a positive effect on most oil companies, in the long run, it may have the opposite effect as green companies expand. However, oil is still a necessity around the world and until green energy becomes advanced and as readily available as oil, the oil companies will continue to dominate the energy industry. As the oil companies continue to dominate the energy market, they can create new projects that will bolster their stance if they decide to shift to green energy.