Here's Why Holding Transocean Stock Is Justified for Now

Over the past three months, shares of Transocean Ltd RIG gained 21%, outperforming the Zacks Oil & Gas-Drilling sub-industry growth of 18.9% and significantly exceeding the broader Zacks Oil & Energy sector’s 5.9% increase. This stronger relative performance highlights Transocean’s leading position within the sub-industry and its ability to outperform both the Oil & Gas-Drilling sub-industry and the broader Oil & Energy sector.

3-Month Performance Snapshot

RIG Stock’s Earnings Estimates

Over the past 60 days, the Zacks Consensus Estimate for RIG’s earnings per share has remained unchanged for fiscal 2025, while it has been revised downward by 11.76% for fiscal 2026. This indicates that while near-term prospects remain stable, uncertainties cloud be the longer-term earnings picture.

Strengths Supporting the Stock

Premier High-Specification Fleet Catering to Complex Demand: A Switzerland-based oil and gas drilling company differentiates itself through the ownership of the highest specification ultra-deepwater and harsh environment fleet in the world. This focus on technically demanding sectors makes RIG the partner of choice for major operators in challenging environments, allowing it to command premium day rates. Examples like the Deepwater Atlas successfully bringing a 20,000-psi reservoir online underscore the technological edge and reliability of its assets, which is critical for winning high-value contracts.

Strong and Growing Backlog Providing Revenue Visibility: RIG possesses an industry-leading backlog of approximately $7 billion. This substantial contracted revenue stream provides significant visibility and stability for the company's cash flows over the coming years. This backlog acts as a buffer against short-term market volatility and forms the foundation for their plan to reduce debt and improve financial flexibility, as management repeatedly emphasized the importance of converting backlog into revenues.

Disciplined Cost Management Improving Profitability: RIG is actively implementing cost-saving initiatives, including a plan to sustainably reduce cash costs by about $100 million in both 2025 and 2026, primarily from fleet operating expenses. Additionally, it has identified further savings of approximately $50 million annually starting in 2026 by improving shore-based organizational efficiency. These efforts are already reflected in the second quarter's operating and maintenance expense, which came in below guidance, and directly aimed at expanding EBITDA margins, which were a healthy 34.9% in the quarter.

Active Debt Reduction Strengthening the Balance Sheet: Management is clearly focused on deleveraging, with a stated goal to reduce debt by more than $700 million in 2025. The company is on track with this objective, which is a critical step toward improving financial resilience and achieving its target leverage ratio. Reducing total debt and interest expense is paramount to simplifying the balance sheet and eventually creating capacity for potential future returns to its shareholders, a key point highlighted by the chief financial officer.

Headwinds Impacting Performance

Near-Term Market Softness and Day Rate Moderation: RIG’s management acknowledges a current slowdown in contracting activity, leading to a moderation in leading-edge day rates from the mid-to-high $400,000s to the low $400,000s. Utilization is expected to bottom in the mid-80% range before recovering. This near-term softness creates a challenging environment for securing new long-term contracts at attractive rates, potentially impacting revenues and profitability until the market tightens as projected for late 2026.

Dependence on Key Geographic Regions and Customers: A significant portion of future demand growth is concentrated in specific regions like Africa, Brazil and the Mediterranean. Any geopolitical instability, regulatory changes or budget cuts by major national oil companies (e.g., Petrobras) or international oil companies (e.g., BP, Shell) in these regions could disproportionately affect Transocean. The company's fortunes are closely linked to the materialization of specific tender opportunities in these areas.

Execution Risk Associated With Cost-Saving Initiatives: While the announced cost-saving targets of $100 million per year are ambitious, there is inherent execution risk in achieving these efficiencies without impacting operational performance. Management has stated these actions will not compromise safety or reliability, but any missteps in streamlining operations or the shore-based organization could potentially affect the quality of service, which is a key differentiator for the company.

High Leverage and Substantial Interest Burden: RIG carries a significant debt load, with long-term debt of $5.9 billion as of June 30, 2025. The associated interest expense is a major burden, net cash interest expense is forecasted to be between $540 million and $545 million for the full-year 2025. This high fixed cost consumes a large portion of the company's operating cash flow, limiting financial flexibility and increasing risk, especially if the anticipated market recovery is delayed or less robust than expected.

Verdict for RIG Stock   

RIG boasts a premier fleet tailored to ultra-deepwater and harsh environments, giving it a competitive edge and allowing to secure high-value contracts at premium rates. Its industry-leading $7 billion backlog provides strong revenue visibility, while disciplined cost management and a clear plan to reduce debt by more than $700 million in 2025 support profitability and financial resilience.

However, near-term market softness is pressuring day rates and utilization and the company remains heavily reliant on specific geographic regions and key clients, introducing concentration risk. Additionally, execution risks tied to aggressive cost-cutting efforts and a substantial debt load with high interest expenses could weigh on performance.

Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios.

Key Picks

Investors interested in the energy sector might look at some better-ranked stocks like Repsol REPYY, Canadian Natural Resources Limited CNQ and Vitesse Energy, Inc. VTS, each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Repsol is a global energy company known for its integrated operations spanning exploration, production, refining and marketing of oil and gas. It actively pursues innovation and sustainability initiatives to transition toward cleaner energy solutions while maintaining a strong presence in key international markets. Repsol is valued at $20.73 billion. 

Canadian Natural Resources is one of Canada's largest independent crude oil and natural gas producers. The company has a diverse portfolio of assets across North America, the North Sea and Offshore Africa. Canadian Natural Resources is valued at $68.41 billion.

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This article originally published on Zacks Investment Research (zacks.com).

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