How Sensitive Is Transocean’s Enterprise Value To Its Capital Expenditure?

-70.72%
Downside
6.28
Market
1.84
Trefis
RIG: Transocean logo
RIG
Transocean

Transocean (NYSE:RIG), the world’s largest offshore drilling contractor, has been facing a tough time in the current commodity downturn. The plunge in commodity prices has resulted in a sluggish demand for drilling rigs, as oil and gas majors across the globe have reduced their exploration and drilling spending to survive the down cycle. As a result, the Swiss company has witnessed a notable drop in its revenue as well as profitability, causing its stock price to drop by more than 33% over the last one year. This has forced the oilfield services company to cut back its capital expenditure and reorganize its existing fleet of rigs by either scrapping, stacking, and/or making some of its rigs idle. Below, we show how Transocean’s capital spending has dropped over the last few years. Further, the company expects to reduce its capital budget to $1.4 billion in 2016 to weather the commodity slump.

RIG-Q&A-13-1

Since capital expenditure is a critical factor affecting the valuation of a company, we discuss how a change in Transocean’s capital spending will impact its enterprise value. In our base case, we assume that the demand-supply mismatch in the oil markets will ease out over the long term, resulting in a gradual improvement in the oil prices. Accordingly, we expect crude oil prices to recover to $90 per barrel by 2023. In this case, Transocean’s capital expenditure will be $1.37 billion in 2016 and will grow at a compounded annual growth rate of roughly 4% till 2023. As a result, the company’s enterprise value will stand at $9.5 billion.

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However, if we assume that the over-supply in the oil markets prevail for longer-than-expected, and oil prices reach only $70 per barrel by 2023, the company’s capital spending in 2016 will be $1.12 billion, resulting in an enterprise value of $11.6 billion, 22% higher than our base case. Similarly, in a downside case, where oil prices reach $100 per barrel in 2023 due to higher demand, the oilfield services contractor’s capital expenditure will increase to $1.5 billion in 2016 and the enterprise value will fall to $8.5 billion, 11% lower than our base case. Thus, we figure that Transocean’s enterprise value is highly sensitive to its capital spending.

RIG-Q&A-13

Have more questions about Transocean (NYSE:RIG)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Transocean

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