What a time it’s been for Transocean. In the past six months alone, the company’s stock price has increased by a massive 114%, reaching $6.67 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Transocean, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Transocean Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than RIG and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Unfortunately, Transocean’s 4.7% annualized revenue growth over the last five years was sluggish. This was below our standard for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
Transocean, which averaged 36.6% gross margin over the last five years, exhibits poor unit economics in the sector. It means the company will struggle more at lower commodity prices than peers with better gross margins. 
3. Shrinking EBITDA Margin
Adjusted EBITDA margin is an important measure of profitability for the sector and accounts for the gross margins and operating costs mentioned previously. Unlike operating margin, it is not distorted by accounting conventions around reserves, drilling costs, and assumptions on commodity consumption from the well or basin. Adjusted EBITDA highlights the economic reality of how much cash the rock produces before the capital structure (debt service) and the drilling budget (capex) are considered.
Looking at the trend in its profitability, Transocean’s EBITDA margin decreased by 2.8 percentage points over the last year. Transocean’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its EBITDA margin for the trailing 12 months was 34.6%.
Final Judgment
We see the value of companies helping consumers, but in the case of Transocean, we’re out. After the recent surge, the stock trades at 34.8× forward P/E (or $6.67 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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