The shares of Transocean Ltd. (NYSE: RIG) have recovered to pre-Covid levels assisted by the recent surge in benchmark prices. However, the company’s $7.8 billion of long-term debt, which is almost 3x its current market capitalization, is a drag on shareholder returns due to sluggish demand and high interest costs. Transocean is a leading provider of offshore drilling services to upstream companies. The offshore drilling industry has been observing a downturn in recent years due to low benchmark prices and an increase in renewable energy investments. As the oil majors aggressively implementing operational and capital efficiency measures, the demand for offshore drilling is likely to remain low in the near term. Our interactive dashboard analysis highlights Transocean’s stock performance during the current crisis with that during the 2008 recession.
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 87% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
- How Will Transocean Weather The Lull In The Offshore Rig Market?
- How Are Transocean’s Key Metrics Expected To Trend?
- Key Takeaways From Transocean’s Q4 Results
- What To Watch As Transocean Reports Q4 Results
- What’s The Outlook Like For Transocean In 2019?
- What’s Transocean’s Outlook Like After Solid Q3?
In contrast, here’s how RIG and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Transocean Stock vs S&P 500 Performance Over 2007-08 Financial Crisis
RIG stock declined from levels of around $121 in September 2007 (pre-crisis peak) to levels of around $60 in March 2009 (as the markets bottomed out), implying RIG stock lost 44% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $83 in early 2010 – rising by 38% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.
Asset impairments have slashed the company’s asset base by 25%
Transocean’s revenues increased by 6% from $2.9 billion in 2017 to $3.2 billion as global oil demand remained relatively flat with a downward pressure on benchmark prices. Net margins improved slightly largely from lower asset impairments in recent years. Notably, the company has observed $4 billion of asset impairments since 2017 – almost a quarter of the total property plant and equipment. While the improvement in the company’s finances largely depends on global crude oil demand and supply constraints by the OPEC, the highly leveraged balance sheet poses a downside risk. Thus, we believe that the stock has a sizable downside even though benchmark prices have recovered.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Given the company’s highly leveraged balance sheet and a declining order backlog, Trefis believes that the stock is likely to observe a correction after the recent rally.
The world’s leading oil & gas company, Exxon Mobil, also incurred sizable impairments in 2020. Exxon Mobil Stock Comparison With Peers summarizes how XOM compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.