Shareholders of Transocean Ltd. (RIG - Free Report) seem to be confident about the company’s bet on the recovering offshore space. This is reflected in their recent approval for the Ocean Rig UDW Inc. acquisition at the company’s Extraordinary General Meeting. Transocean’s $2.7 billion cash-stock acquisition deal with smaller rival Ocean Rig, in early September, is set for closure shortly.
Post acquisition, Transocean will own 79% stake in the combined entity and Ocean Rig will hold the remaining 21%.
The strategic acquisition is expected to lead to significant commercial, financial and operational synergies, owing to the integration of asset, systems and staff. The transaction aims to reduce costs through economies of scale and the company is likely to gain annual cost savings of $70 million.
Investors should know that the deal falls in line with Transocean’s strategy. The company has been streamlining its portfolio by exclusively focusing on deep-water floaters and tapping into lucrative growth opportunities. Furthermore, the acquisition will cement Transocean’s position in the offshore drilling industry, with the addition of 13 drillships to the company’s fleet. The deal will expand Transocean’s presence in Brazil, Norway and West Africa, placing it much ahead of its competitors in terms of the number of deep-water rigs.
It will also enhance the already robust backlog of the company by $743 million. As of Oct 22, Transocean’s backlog stands at $11.5 billion.
However, the transaction will lead to a cash outgo of $1.1 billion, which can put pressure on Transocean's liquidity metrics. At the end of third quarter, long-term debt of the company was $8,955 million, with a debt-to-capitalization ratio of 42.8%, much higher than 38.3% of the industry average.
While the deal may adversely affect the near-term financials of Transocean, it is expected to boost its long-term opportunities and help the combined entity to penetrate the deep-and harsh-water markets more effectively.
Steinhausen, Switzerland-based Transocean has lost 3.2% in the past year compared with 14.4% collective fall of the industry it belongs to.
Zacks Rank and Stocks to Consider
Currently, Transocean carries a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks given below:
Houston, TX-based Enterprise Products Partners L.P. (EPD - Free Report) holds a Zacks Rank #1 (Strong Buy). The company’s earnings for 2018 are expected to surge more than 36% year over year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rome, Italy-based Eni S.p.A. (E - Free Report) has a Zacks Rank #1. Its earnings for 2018 are expected to grow more than 100% from the 2017 level.
Houston, TX-based Shell Midstream Partners, L.P. (SHLX - Free Report) carries a Zacks Rank #2 (Buy). The company’s profits for 2018 are expected to grow nearly 20% from 2017.
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