Goldman Sachs Comment on Transocean's (RIG) Caledonia Spin-Off

Goldman Sachs reiterated a Sell rating on Transocean (NYSE: RIG) with a price target of $30.00. Comments follow an announcement the company is considering the separation of Caledonia, an entity for its 8 mid-water North Sea floaters.

Analyst Waqar Syed said, "The announcement is in line with RIG’s plan outlined at the analyst day in 4Q13 to high grade its rig fleet. These eight 2nd/3rd generation rigs built prior to mid-1980’s are nearing retirement, but still carry substantial revenue backlog. RIG will either sell these assets to interested parties or spin them off. We estimate that the revenue backlog these rigs carry equals $1.5bn, and they contribute 9.2% of RIG’s revenues and 13.6% of its gross profit forecast for 2014. For 2015, we estimate the revenue contribution to be 9.2% and gross profit contribution to be 14.9%."

"While we applaud RIG’s efforts to high grade its fleet, the deal will be dilutive to current cash flows and EPS. The company may use the proceeds to buy a new deepwater rig, but any deal will likely be dilutive, as these old rigs were over-earning generating roughly $392K/day in dayrate. Replacing that cash flow will be challenging in today’s tough contracting environment. The sale could improve RIG’s balance sheet in the near term, if any cash generated is kept on the balance sheet, but such a move would impair the company’s long-term earnings power," 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 $42.85 yesterday.

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