The Case for Transocean

Thanks to a poorly constructed stock screen, I ended up entering a bullish option spread on Transocean, Ltd (RIG). This has been quite a bad trade, but since it is inside a test portfolio, I have not divested of it to experiment on how to salvage a bad situation.

The purpose of this post is to spell out the reasons I think RIG is a good company in the middle of a cyclical bloodbath. Without going into detail of my ideas on it, here are the main reasons I think this stock will recuperate quite well once oil prices stabilize.

1. The large dividend is safe because of the financial flexibility provided to it by the MLP RIGP.
2. Transocean opened a $3B 5 year revolving credit facility on June 2014. (See 10-Q for details)
3. Also according to the 10-Q, Scheduled Maturities over the next quarters ending in 3Q16 equal $1.4B. This figure does not include the $207M redemption in November of the outstanding 4.95% Senior Notes due 2015.
4. The balance sheet is healthy as attested by Fitch in November: "Fitch views the timing of this month's impairment as a signal to the oversupplied market that, consistent with our view, industry-wide rationalization is needed ahead of scheduled newbuild deliveries to improve market balance and, ultimately, realize a cyclical improvement. Transocean has illustrated that rationalization can strengthen its cash flow and asset profile. This is evidenced by the stabilization of EBITDA and improvements in utilization and day rates following its 2011 impairment."
5. Fitch rates Transocean as Stable BBB-, the lowest of Investment grades. But the implied rating based on the CDS price is a much better BB-.
6. The $24B backlog of contracts should allow RIG to keep the fleet at work through the downturn even if it lasts into 2016. Note that in the November Fleet Summary, the expected Out of Service days actually went down by 225 for 2015.

Based on the financials, RIG should be well positioned to go up once the oil market stabilizes from its swan dive and the oil producers are able to reengage in Capital Expenditure planning.