Ahead Of The Bell: Transocean Downgraded

NEW YORK (AP) — A sharp decline in deep water and ultra-deepwater dayrates expected for late 2010 and 2011 will cut away at profits for Transocean Ltd., said an analyst Monday as he downgraded the offshore drilling contractor.

Jefferies & Co. analyst Judson Bailey lowered his rating for Transocean to "Hold" from "Buy" due to expectations that the deep water rig market will be oversupplied by late 2010 and 2011, which will drive down dayrates and earnings.

"Although Transocean maintains the largest fleet of ultra-deepwater assets in the world, almost 50 percent of the company's revenue comes from jack-ups and midwater semis — asset classes where utilization and dayrates are likely to remain under pressure for the next 12 months," Bailey said, adding that earnings per share will likely decline through 2011.

Bailey lowered his 2009 and 2010 earnings estimates to $12.05 per share and $10.08 per share, down from an earlier forecast of $12.57 per share and $11.12 per share, respectively.

Analysts polled by Thomson Reuters estimated 2009 and 2010 earnings, on average, at $13.17 per share and $12.90 per share, respectively. Bailey maintains a price target of $70 for the company's stock.

As the company's stock has reached a fair value, Bailey recommended investors to "pull back the reins" on Transocean and invest in more attractively valued stocks such as Noble Corp. or Pride International Inc., and in more volatile stocks such as Ensco International Inc. or Rowan Companies Inc.

Shares of Transocean closed at $68.97 on Friday.