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

2. 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%

3. Company Overview
In 1953 Alabama based Southern Natural Gas company purchased assets to form The Offshore Company. It was renamed Sonat Offshore Drilling in and then was spun off in 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

4. 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.

5. 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.

6. 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

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

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

9. RIG has cut costs and reduced its debt

10. 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

11. DCF Analysis – Base Case
Enterprise Value
10549
Less Debt
8464
Add Cash
3052
Equity Value per Share $
Current Share Price $
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%

12. DCF Analysis – Bear Case
Enterprise Value
7199
Less Debt
8464
Add Cash
3052
Equity Value per Share $
Current Share Price $
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%

13. DCF Analysis – Bull Case
Enterprise Value
12167
Less Debt
8464
Add Cash
3052
Equity Value per Share $
Current Share Price $
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%

14. 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