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Transocean at 52-Week Low: Is the Share Price Fall Justified?

Zacks Equity Research

Shares of Transocean Ltd. RIG slumped to a 52-week low of $11.26 on Aug 26, 2015. The fall in share price follows the company’s announcement of dividend suspension. The closing price of this offshore drilling giant’s shares on Wednesday was $11.60.

What Led to the Price Decline?

The company has proposed to cancel the third and fourth installation of its dividends. Earlier this year, the company announced an 80% cut in dividend to tackle the pricing woes. However, that does not seem to have panned out well, thereby requiring harsher measures.

Moreover, Transocean stated that it plans to cancel all the shares that have been repurchased under its share buyback program approved in 2009. These proposals would be put to shareholders’ vote in an Extraordinary General Meeting of Shareholders to be held on Oct 29.

Further, the company anticipates non-cash impairments of over 2 billion Swiss francs. This is primarily due to the deteriorating condition of the offshore drilling market.

The stock has already plunged nearly 37% this year. Lower investments in the energy space led to a fall in demand for rigs. In order to counter such a grim financial scenario, Transocean, like many of its peers, has targeted investors’ payout as a means to preserve cash.

Is the Price Fall Justified?

The decline in stock price was anticipated as investors were bound to shun the stock on having their dividend income put on hold.

However, it may be argued that it was a logical move by the company amid the plunge in crude prices to the sub-$40 per barrel level. The company needs to preserve cash now to remain a long-term value prospect.

Also, one must consider that this Zacks Rank #2 (Buy) stock has a technologically advanced and versatile fleet that commands better dayrates than most of its peers. Moreover, Transocean’s robust backlog of about $18.6 billion supports it in this current downturn.  

Other Stocks that Warrant a Look

Other favorably-placed stocks from the broader energy sector include Alon USA Energy, Inc. ALJ, Alon USA Partners, LP ALDW and Warren Resources Inc. WRES. All these stocks sport a Zacks Rank #1 (Strong Buy).

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