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Transocean (RIG) Downgraded To 'Sell' By Deutsche Bank

 February 17, 2013 09:53 PM

(By Balaseshan) Deutsche Bank analyst Mike Urban downgraded rating of Transocean Ltd. (NYSE: RIG) to "Sell" from "Hold" with the recent move in the stock and ongoing upward pressure on downtime, while maintaining $49 price target.

While RIG has made significant progress in addressing its myriad issues, the market and its fleet may increasingly be working against it, the analyst noted.

Despite a recent update on downtime, yesterday's fleet status report showed a 7% increase in 2013 downtime and the first estimate of 2014 downtime is up an additional 5% versus 2013 (despite a shipyard stay being pulled into 2013 and ongoing efforts to improve revenue efficiency), Urban noted.

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Meanwhile, costs are rising even as rates are flattening. With greater visibility on its Macondo liability and greater clarity on the demands of activist Carl Icahn, most catalysts have been realized as well , the analyst noted.

The analyst is adjusting his RIG estimates to reflect the most recent fleet status report released today. Higher downtime overshadowed a decent contract on the Sedco 712. The initial estimate for downtime in 2014 of 2,131 days is higher than the current expectation for 2013 and higher than what he was expecting for 2014.

The brokerage lowered its 2013 EPS estimate to $4.59 from $4.69 and its 2014 estimate to $5.70 from $5.95. DB maintained its Q4 and 2012 EPS estimate of $0.76 and $3.60, respectively.

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Urban said dramatic near-term improvement in deepwater dayrates/renewed acceleration in dayrates or improved visibility in the global shallow water markets (ability of the market to absorb new capacity at current market rates) as well as shareholder activism could drive upside.

Even if Icahn is successful in extracting a $4/share dividend from RIG (an upside risk), the analyst believes this would leave RIG significantly disadvantaged in terms of its ability to re-capitalize its fleet and/ or participate in M&A.

RIG is trading down 5.56% at $56.00 on Friday.

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