RIG stock: 10% loss and then rebound on August 3 | How to evaluate the risk

 August 3, 2021

Here is the article.

Key Points

• Transocean's backlog isn't growing just yet.
• The deep-ocean driller is negotiating with customers and foresees a strong 2022.

What happened

Transocean (NYSE:RIG) stock got a big jolt on the morning of Aug. 3 and tumbled 12% by 10 a.m. EDT. It found some respite as the day progressed, though, and closed the day down only about 3%. 

The market dumped shares of the offshore oil and gas drilling services company as it got hold of its second-quarter numbers reported late in the evening of Aug. 2. But investors seem to have spotted a silver lining in the company's outlook.

So what

At a time when pockets of the oil and gas industry are making money off this year's rally in oil prices, Transocean's contract drilling revenue slumped 29.4% year over year and its adjusted net loss ballooned to $109 million from $1 million in Q2 2020. Although consensus estimates called for a loss, the sharp drop in Transocean's revenue caught the market off guard.

To be fair, the offshore drilling market has been stuck in a rut, so Transocean's struggles aren't company-specific. However, Transocean has managed to keep its head above water so far, and investors sent the stock soaring in recent months in anticipation of better days ahead amid the oil market recovery.

Transocean's revival depends a great deal on its backlog and the day rates it charges on rig rentals. Transocean won two contracts in late July, but it's also had to delay the delivery of two drill ships. Importantly, Transocean's backlog was $7.3 billion as of July 21, down both from its $8.9 billion backlog in the corresponding period last year and its $7.4 billion backlog as reported in April 2021. If day rates are low, drillers often end up burning cash instead of building their backlog.

Now what

Although Transocean's numbers leave much to be desired, management hinted at improving customer sentiment during the company's earnings call, and said it was responding to more tenders as well as negotiating directly with customers, particularly in the Gulf of Mexico.

"As we enter the back half of this year, we remain encouraged by the upcycle that is currently unfolding. Assuming oil prices remain supportive, we see utilization and day rates for our ultra-deep water assets materially improving as we move into 2022," CEO Jeremy Thigpen said during the earnings release.

With Transocean also ending the second quarter with a cash and cash equivalents balance of nearly $1 billion, oil and gas investors are hopeful the company will see better days ahead and avoid a much-feared bankruptcy.