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Transocean (RIG) Down as Reliance Terminates Rig Contract

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Offshore drilling giant, Transocean Ltd. (RIG - Free Report) saw its shares decline 7.6% in the after-hours trading session on October 3 after India-based Reliance Industries Ltd. decided to exercise the option to terminate its contract for Transocean's Discoverer India rig ahead of schedule.

The ultra-deepwater drillship will be pulled out of service in Dec 2016, four years before the scheduled contract expiry in Jan 2021. Per the contract, Transocean will receive a lump sum compensation amount of approximately $160 million from Reliance for the early termination.

This is another sign that the collapse in crude prices that began in mid-2014 amid a glut of supply and slowing demand for the commodity has affected the offshore drillers badly as oil companies cut back their capital spending.

In a separate development, Transocean received a 15-month contract from Suncor Energy Inc. (SU - Free Report) for Barents ultra-deepwater rig of the former. This rig is expected to commence operations off the Canadian coast in the third quarter of 2017. The contract has a dayrate of $260,000.

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, the persistent weakness in oil prices has significantly hurt Transocean's business. Also, with large, multinational energy firms looking to reign in their skyrocketing capital expenses, the drilling space is witnessing intense competition as multiple firms chase a single contract. This excess capacity, in turn, could lead to further lowering of utilization or dayrates.

Hence, Transocean currently 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 broader energy sector include Evolution Petroleum Corp. (EPM - Free Report) and China Petroleum & Chemical Corp. (SNP - Free Report) . Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last four quarters, Evolution Petroleum posted an average positive earnings surprise of 45.8%.

China Petroleum & Chemical, on the other hand, posted an average positive earnings surprise of 1,383.3% in the last four quarters.

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