We are downgrading Transocean (RIG) shares to Underperform from Neutral, due to the potential fallout from the Gulf of Mexico oil spill. The company’s earnings are likely to suffer from the uncertainty in the near-to-medium term outlook for deepwater drilling, as reflected by the strong negative agreement among analysts regarding Transocean’s outlook and the notable number of downward estimate revisions.
The slow pace of new contracting activity, reduced dayrates, declines in utilization and the stacking of idle equipment add to the bearish sentiment. Although Transocean has a significant backlog of $28.6 billion, we are apprehensive that the backlog may decline if the company fails to obtain new contracts for rigs.
For Transocean, the operator of the doomed Deepwater Horizon drill rig in the GoM spill, earnings are likely to suffer. The company has already warned investors regarding the risks associated with the Horizon rig disaster, including legal costs, government investigations and lost revenue.