Buy or not to buy Transocean Ltd?

Tickers: RIG GE

Author: Value Investor  Date: 2021/04/14

The Transocean Ltd stock (NYSE: RIG) yesterday closed at $3.15 in New York. No doubt, it had a beautiful run since last October when it traded under one dollar. It was not alone, though. Many well-beaten, neglected and even despised stocks bounced nicely since then - just take a look at GE.

It appears that investors were just looking for a place to park their money. Looking back, at was a very wise decision on their part - though nobody could have known this at that time. It is still a good idea to hold on to these stocks that had more than their fair share of troubles even before the Covid stroke the world economy? There is no one-fit-all answer to that: each company has its unique set of circumstances and prospects. 

This is particularly true of Transocean. By almost any measure, it is a fine company. And it trades at what appears to be ridiculously low valuations. Just take a look at the price-to-book ration of less than 0.2! This is almost insane. Or is it? Let’s take a closer look, The company has fine assets - it is a world leader in deep ocean drilling for oil. It have a young, ambitious and very capable CEO. What’s more, it is headquartered in Switzerland.

I know, it all depends on the price of oil, which despite the global recession is just not rolling over. Nobody can predict the price of oil - that’s the problem. What’s more, the company has been consistently loosing money for the past four years - not a very encouraging sign. No wonder its stock price has fallen so much from the peak of around $170 in October 2007.

There is a case to be made for both sides of the trade here. Which side I am on? Well, I like the company and almost everything about it, except the oil price risk. Deep ocean drilling is very expensive. With fracking, there are a lot cheaper alternatives ashore. So, to be on a solid ground, I would stay away from the stock - no matter how tempting the opportunity seems to be at the moment.