Transocean LTD (NYSE:RIG) Buy Pitch Middlebury SIC – Energy and Transportation Group 3/23/2017

Investment Thesis Thesis: Transocean has posted impressive results despite industrywide tailwinds and is currently undervalued relative to its true worth. Current Price: $12.45 52-week high of $16.66, low of $8.34 Price target: $16.80 Implied upside: 35%

Company Overview In 1953 Alabama based Southern Natural Gas company purchased assets to form The Offshore Company. It was renamed Sonat Offshore Drilling in 1982 and then was spun off in 1993. In 1996 it was acquired by Transocean ASA for $1.5B. In 1999  it merged with Sedco Forex (offshore subsidiary of Schlumberger). Became world's largest offshore operation after acquiring R&B Falcon Corporation. Merged with GlobalSantaFe in 2007 and moved its headquarters to Switzerland in 2008 (lower taxes). Transocean is currently a part of the S&P 500 Index. Transocean Ltd is the largest offshore drilling contractor by rig count. Transocean specializes in deepwater drilling. CEO: Jeremy Thigpen CFO: Mark Mey COO: John Stobart

Company Overview (Cont.) Revenue: $4.1 billion Price/Book: 0.57 Market Cap: $4.9 billion P/E: 5.97 5,400 employees Transocean’s stock price has fallen 90% from all time highs in 2008 following the financial crisis, Deepwater Horizon disaster and the multi-year slump in oil prices.

As one of the largest oil rig companies in the world, Transocean has the advantage of a diversified customer base and assets that can operate in a variety of areas, including harsh environment and deep-water drilling.

SWOT Analysis Strengths Weaknesses Solid liquidity - respectable EBITDA margin of 51% for full-year 2016 and ample working capital. Revenue efficiency remained strong – more than 100% in 4Q16. Healthy cash flows – enough to cover decent capex spending levels Diversified customer base Opportunities Sale of jackup fleet allows RIG to focus on core competencies going forward With one of the best capital structures in the industry, they will be well positioned if/when crude rises Low expectations for the industry as a whole might mean RIG outperforms Weaknesses The global offshore rig count continues to deteriorate Deepwater and Harsh Environment segments expected to experience the largest dayrate declines Macro picture is weak Threats Prolonged sub-$60/bb will hurt RIG further RIG faces competition not only from renewables but also fracking/shale Core contract revenue continues to decline Backlog may continue to shrink

Despite challenging industry conditions, cash flow has increased and profit margins have improved.

Profitability has been helped by a large contract backlog, helping the company survive a prolonged downturn

RIG has cut costs and reduced its debt

Comparable Analysis Transocean LTD Ensco PLC Helmerich & Payne Diamond Offshore EV 10,239.6 5,227.5 6,776.3 4,072.8 EBITDA 2,103 1,378.6 397.2 706.8 Market Cap 4,796.6 2,550.9 7,155.4 2,114.0 Debt/Equity Current Ratio Quick Ratio Return on Equity 53.46 63.89 10.78 55.60 2.57 3.84 4.76 1.49 1.99 3.44 4.01 1.18 5.01 11.83 -1.24 -9.47

DCF Analysis – Base Case Enterprise Value   10549 Less Debt 8464 Add Cash 3052 Equity Value per Share $ 13.18 Current Share Price $ 12.45 Upside (Downside) 5.90% Assumptions Terminal Growth Rate 2.00% Terminal Value 13032 PV of Terminal Value 9205 Revenue Growth 2% Beta 1.78 WACC 7.20%

DCF Analysis – Bear Case Enterprise Value   7199 Less Debt 8464 Add Cash 3052 Equity Value per Share $ 4.59 Current Share Price $ 12.45 Upside (Downside) -63.16% Assumptions Terminal Growth Rate 2.00% Terminal Value 8738 PV of Terminal Value 6172 Revenue Growth -5% Beta 1.78 WACC 7.20%

DCF Analysis – Bull Case Enterprise Value   12167 Less Debt 8464 Add Cash 3052 Equity Value per Share $ 17.34 Current Share Price $ 12.45 Upside (Downside) 39.27% Assumptions Terminal Growth Rate 2.00% Terminal Value 15062 PV of Terminal Value 10640 Revenue Growth 5% Beta 1.78 WACC 7.20%

Conclusion Pros Last quarter’s stronger-than-expected earnings report was a sign of management’s ability to control costs. It has slashed costs by $3.9 billion, to an estimated $2.1 billion over the past four years RIG’s book value and P/E are below the industry average Net debt has dropped to $5.7 billion from $9.5 billion in 2011, and total liabilities have fallen 30%, to $11 billion. Transocean is a “lower levered bet on improved fundamentals” – Arctic Securities Cons Analysts project losses this year and next as revenues finally bottom out near $2.8 billion. In 2016, 28 of Transocean’s 57 rigs were either idle or completely mothballed and renewed demand is dependent on higher oil prices. “The offshore drilling market will continue to prove challenging as the combination of contract roll- overs and limited visibility to new demand will hinder, in the near-term, the meaningful advancement of both utilization and dayrates.” – latest 10-K Recommendation: Buy at market price with the expectation that RIG will reach $17 in 2 years