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Transocean (RIG) Stock Up 15% on Offshore Drilling Contract

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Offshore drilling giant, Transocean Ltd. (RIG - Free Report) has outbid its competitors for an offshore development in India at a time when drillers are facing rig contract terminations. The contract primarily helped Transocean to surge almost 15% on the NYSE.  

In detail, Transocean has entered into a 730-day contract with Oil and Natural Gas Corporation Limited (ONGC) for one semi-submersible rig that will likely be operating at a dayrate of $127,000. Notably, ONGC is the largest oil and natural gas exploration and production player in India.

Importantly, the dayrate that Transocean is offering is much low but still better than keeping the rig idle. Analysts are expecting such a low rig rate to likely hurt Transocean’s earnings in the coming quarters.

Investors should also note that a rally in oil price has helped the Transocean stock to rise. West Texas Intermediate (WTI) crude closed at $49.69 a barrel yesterday, the highest mark since Jul 21, 2015. Disruption in supply from Canada and Nigeria, a weak dollar and the lower probability of a Federal Reserve rate hike in the near term led to the outperformance of crude.

Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. The company offers unmatched levels of earnings and cash flow visibility, given its technologically advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power.

However, we expect Transocean shares to remain soft until oil prices rebound. Although oil is walking in the bullish path, it is still way below the mid-2014 level.

Transocean carries a Zacks Rank #3 (Hold), implying that it will perform in line with the broader U.S. equity market over the next one to three months.

Some better-ranked players in the same space are Independence Contract Drilling, Inc. ICD, North Atlantic Drilling Limited NADL and Hercules Offshore Inc. HERO. Independence Contract and North Atlantic Drilling sport a Zacks Rank #1 (Strong Buy) while Hercules Offshore carries a Zacks Rank #2 (Buy).

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