.September 12, 2024 02:46:00 PM

Citi analysts downgraded Transocean (NYSE:RIG) to Neutral from Buy, with a lowered price target of $4.50 from $7.50. The offshore drilling sector faces challenges, with uncertain outlook for energy investors. A modest increase in rig demand by 2026 could result in FCF yields over 20%, but updated forecasts suggest downside risks to 2025 EBITDA expectations due to fewer rig reactivations and lower rates for 6th-generation floaters. Market pullbacks and investor conversations may have already factored in some concerns.

In a realignment, analysts shifted preference to Seadrill (SDRL), upgrading it to Buy with a $52 target price. Seadrill’s strong FCF yield potential and expected contract renewals for Brazilian rigs were cited as reasons for the upgrade. Transocean’s valuation, despite strong contracts, remains at a premium under conservative assumptions. Analysts speculate that Transocean could potentially be a suitor for Seadrill, contributing to the downgrade.