Transocean's (RIG) Day of Reckoning Approaching, Says Deutsche Bank; Analyst Reiterates Sell Rating

Deutsche Bank reiterated a Sell rating on Transocean (NYSE: RIG) with a price target of $16. Earlier it announced a non-cash charge of $1.97 billion related to the impairment of goodwill. The charge is the result of impairment testing conducted due to the decline in the market valuation of the contract drilling business.The company also expects an impairment of the Deepwater Rig asset group of $788 million. Analyst Mike Urban said the company's "day of reckoning" is approaching.

"Despite significant short-interest and limited borrow, we expect RIG shares to trade off today on news that the company plans to take both goodwill and asset impairment charges resulting in a delay in the Q3 earnings release. RIG has put off addressing the impact of deteriorating offshore market fundamentals on its ability to finance competing capital needs for the next few years. We see expect continued pressure on RIG shares until a comprehensive, credible and sustainable plan is outlined to the market. We are therefore reiterating our SELL rating," said Urban.

"We believe RIG has been counting on the ability to drop assets into its MLP and asset sales in order to cover its multi-billion $ CAPEX commitments, ~$1B annual dividend and a wall of upcoming debt maturities over the next few years. While the MLP market is still open, valuations appear to be declining. On the asset sale front, the proposed IPO of RIG’s UK midwater fleet (Caledonia) now looks challenging given extremely negative sentiment toward energy and the weakening North Sea / harsh environment market as major customers cut back on spend and Russian sanctions increasingly bite. A drop into the high yield credit market is easier said than done as the market would have to absorb an additional large issuer with large needs (SDRL being the other) even as underlying asset values are increasingly in question (as evidenced by the impairments). Against this backdrop, we cannot rule out the need for equity in addition to a potential dividend cut," he added.

For an analyst ratings summary and ratings history on Transocean click here. For more ratings news on Transocean click here.

Shares of Transocean closed at $29.92 yesterday.

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