RIG Stock: Low Valuation But High Risk?

Forbes

11-06-2025

Transocean (NYSE:RIG), a company specializing in offshore drilling, has significantly lagged behind the broader S&P 500 index over the last twelve months, posting a decline of 45% compared to the S&P 500's increase of 12%. The firm is currently facing financial setbacks, worsened by escalating cost inflation. Its overall financial condition seems fragile, and a slowdown in economic growth is anticipated to further diminish the demand for new oil and gas exploration initiatives. Despite appearing to have a very low valuation, there remain several major concerns about RIG stock.
In this analysis, we present a thorough comparison of Transocean's current valuation with its operational performance in recent years, along with an evaluation of its current and historical financial status. That said, if you are looking for upside with less volatility compared to individual stocks, the Trefis High Quality portfolio offers an alternative — it has outperformed the S&P 500 and generated returns exceeding 91% since its launch. Separately, see – QBTS Stock: What's Next For D-Wave After 1,350% Rally?
From a valuation standpoint, Transocean stock presently seems low-priced when evaluated against its sales or profit. The company's price-to-sales (P/S) ratio is at 0.7, considerably lower than the S&P 500's ratio of 3.0. Likewise, Transocean's price-to-free cash flow (P/FCF) ratio stands at 5.7, significantly beneath the S&P 500's 20.5.
Notwithstanding its low valuation, Transocean has shown substantial revenue growth in recent years. Over the past three years, its top-line revenue has grown at an average annual rate of 11.7%, outpacing the S&P 500's increase of 5.5%. More recently, Transocean's revenues surged by 24.4%, rising from $2.9 billion to $3.7 billion in the past twelve months, compared to the S&P 500's growth of 5.5%. In the most recent quarter, quarterly revenues experienced a significant increase of 18.7%, climbing to $906 million from $763 million a year earlier, greatly exceeding the S&P 500's improvement of 4.8%.
However, the profitability indicators of Transocean present a stark contrast to its revenue growth. The company's profit margins are weaker than those of most firms within the Trefis coverage universe. Over the last four quarters, Transocean reported an Operating Income of $431 million, leading to a modest Operating Margin of 11.7%, which is lower than the S&P 500's 13.2%. Additionally, its Operating Cash Flow (OCF) for the same period was $559 million, which translates to a moderate OCF Margin of 15.2% when compared with the S&P 500's 14.9%. The most alarming figure is Transocean's Net Income over the last four quarters, which showed a loss of $728 million, indicating a very poor Net Income Margin of -19.9% against the S&P 500's positive 11.6%.
The financial stability of Transocean appears quite weak. As of the latest quarter, the company's debt amounted to $6.6 billion, while its market capitalization stood at $2.7 billion (as of June 10, 2025). This results in a very poor Debt-to-Equity Ratio of 244%, significantly higher than the S&P 500's 19.9%, suggesting a heavily leveraged balance sheet. Furthermore, cash and cash equivalents make up only $263 million of Transocean's total assets of $19 billion, producing a poor Cash-to-Assets Ratio of 2.9%, which is markedly below the S&P 500's 13.8%.
Transocean's stock has also been less resilient compared to the S&P 500 index during recent market downturns. For instance, amidst the Inflation Shock of 2022, RIG stock tumbled 53.5% from its peak of $5.08 on July 2, 2021, to $2.36 on September 23, 2022, representing a more significant decline than the S&P 500's peak-to-trough decrease of 25.4%. Although the stock fully recovered to its pre-crisis peak by January 9, 2023, and later rose to $8.80 by July 31, 2023, it is currently trading around $3.10.
Similarly, during the COVID-19 Pandemic of 2020, RIG stock experienced a drastic drop of 90.6% from a high of $7.17 on January 6, 2020, to $0.67 on October 30, 2020, significantly exceeding the S&P 500's 33.9% decline. It wasn't until February 7, 2023, that the stock regained its pre-crisis peak.
Additionally, during the Global Financial Crisis of 2008, RIG stock fell sharply by 73.8% from $153.00 on May 20, 2008, to $40.04 on December 24, 2008, again a steeper drop compared to the S&P 500's decline of 56.8%. Notably, the stock has yet to return to its pre-crisis high from 2008.
In summary, Transocean's performance across these metrics suggests a generally weak outlook. Although its growth has been robust, it is overshadowed by significantly weak profitability and extremely poor financial stability. Its evident lack of resilience during downturns further amplifies the risk. Despite its current very low valuation, we perceive Transocean as a risky choice. From a long-term perspective, the industry-wide shift toward renewable energy and the increasing environmental regulations are likely to continue fueling investor skepticism about the long-term sustainability of fossil fuel-dependent companies like Transocean, thereby hindering its stock price growth.
Of course, our assessment could be wrong. A rebound in demand for oil and gas exploration projects could provide substantial benefits to RIG stock. The company is also actively working to streamline its fleet, which entails an expected $1.2 billion impairment charge in Q2 for the disposal of two rigs (GSF Development Driller I and Discoverer Luanda) along with the potential future disposal of two additional rigs (Development Driller III and Discoverer Inspiration). This strategic streamlining could enhance the company's operational efficiency moving forward.
Nevertheless, considering the ongoing poor profitability and weak balance sheet, the overall risk associated with Transocean seems high. We believe there are more attractive investment strategies available in the market. Consider Trefis High Quality (HQ) Portfolio which, consisting of 30 stocks, has consistently outperformed the S&P 500 over the past 4-year period. Why is that? As a collective, HQ Portfolio stocks have provided superior returns with reduced risk relative to the benchmark index; less of a roller-coaster experience, as demonstrated in HQ Portfolio performance metrics.