Shares of Transocean (NYSE:RIG) rallied over 185% in six months, outperforming the broader market averages by a wide margin. The company provides offshore contract drilling services. It has witnessed stellar demand for its services, as reflected by the surge in its stock price. While the company’s management expects demand to remain strong, analysts’ price targets indicate that the rally in RIG stock could end soon. Let’s dig deeper.
Strong Demand Supports Upside
The company is benefitting from increased offshore contracting activity that is driving utilization and day rates for Transocean. Furthermore, new contract wins and solid backlogs indicate strong future revenues. Per the company’s February 2023 fleet status report, Transocean secured an incremental $1.5 billion in Q4 and had a total contract backlog of $8.5 billion.
A robust demand environment indicates that the active utilization of RIG’s assets will remain high. At the same time, high day rates will likely support its financials. Further, its ability to secure high-quality backlogs and focus on right-sizing its balance sheet augurs well for growth.
Is RIG a Good Stock to Buy?
The strong demand backdrop and management’s focus on deleveraging its balance sheet bode well for growth. Also, the company’s Chairman, Chadwick C. Deaton, buying its stock demonstrates management’s faith in RIG’s future prospects.
However, RIG stock has appreciated quite a lot while its debt remains high (over $7.3 billion), which could limit the upside.
Citigroup analyst Scott Gruber maintains a Hold rating on RIG stock. While the analyst believes that RIG’s fundamentals are improving on the back of higher day rates, he sees the current valuation as fair due to the company’s high leverage and challenging macro backdrop.
Overall, RIG stock has received three Buy, four Hold, and one Sell recommendations for a Hold consensus rating. Meanwhile, analysts’ average price target of $7.28 implies an upside potential of 3.41%.
