(IDEA) Transocean (RIG)

As we expand our coverage to oilfield services, we prefer offshore drillers to onshore operators. Offshore has entered an upcycle that we believe will be sustained for years. By contrast, onshore confronts risks stemming from equipment overcapacity, customer spending discipline, price competition, stagnating oil production in certain basins, and reduced activity owing to low natural gas prices.

In the offshore drilling space, our favorite pick is Transocean (RIG). The company owns a fleet of 27 high-specification drillships and ten harsh environment floaters. We prefer it over its peers due to the quality of its assets, its concentration in the ultradeepwater segment, and its significant operating leverage that will benefit its shares as the cyclical upturn proceeds.

We believe this is an opportune moment to buy Transocean shares. Offshore drilling contractor stock prices remain depressed, but we are gaining greater visibility into rising day rates. If our bullish oil market thesis plays out, the shares could more than double over the next three to five years.