Morningstar | RIG Updated Forecasts and Estimates from 12 Nov 2018
We are maintaining our Transocean fair value estimate of $8.25 per share after the company's announcement that it has entered into an agreement to acquire Ocean Rig for $2.7 billion in total consideration (equivalent to about 20% of the company's current enterprise value). Based on a acquisition price of about 50% of book value, we think the deal overvalues Ocean Rig somewhat in an absolute sense but undervalues Ocean Rig relative to no-moat Transocean's inflated shares. Therefore, with the deal's split mix of about 60% equity and 40% cash, we think the deal has little net effect on Transocean's value.Transocean's shares fell about 7% following the announcement, reflecting the market's dim view about Ocean Rig's relative value. We think the market is over-discounting Ocean Rig for its paucity of contract backlog--the company's rigs are some of the highest quality in the industry, and we think Transocean will have little difficulty in bringing them up to industry average levels of pricing and utilization. Therefore, we think the market's negative outlook on the deal is unwarranted.
More generally, however, we still think the market is overoptimistic about prospects for offshore drillers, and even after the drop Transocean remains about 35% above our fair value estimate.
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