A host of companies in the oil and gas space got a boost from the rise n oil prices at the beginning of this week, and Transocean LTD (NYSE:RIG) is no exception. The company opened up the Tuesday session at $9.75 a share, before gaining throughout the day to close at $10.68 – a close to 10% gain across the US session.
The gains come, as mentioned, on the back of a boost in oil – WTI crude now trades ahead of $41 a barrel, up nearly 60% on February lows – but there are some more specific factors in play with Transocean. Specifically, the company reported an agreement between it and Jurong Shipyard Ptd Ltd, a subsidiary of Sembcorp Marine, to extend the delivery date on two deepwater drilling rigs, which were scheduled for delivery before the close of the decade. Instead, Transocean will now make delivery during the first and third quarter of 2020, and payment associated with delivery will be made at the same time.
Why is this important? There had been some concern that the order would fall through as a result of the delayed delivery, and not only would this cost Transocean in wasted labor, parts, etc., but there is a high chance that Jurong would initiate litigation on cancellation.
With this in mind, a deferred agreement is a positive (despite its seeming negative connotations) and has compounded the boost in oil to contribute to the gain in Transocean’s market capitalization.
So what are we looking for going forward?
The extension takes the pressure off the company, so we’ll be looking to first quarter 2016 earnings as the next upside driver. For a small cap, the company is a pretty solid financial performer, having reported $791 million in net gains during full year 2015. With this in mind, we’re looking for a strong bottom line for the first quarter. Cash and equivalents came in at a little over $2.6 billion at last count.
DISCLAIMER: There is a substantial risk of loss with any speculative asset, especially small cap stocks. The opinions expressed are those of the author, and do not constitute recommendations to buy or sell a stock. Do your own research before committing capital.
