One of the more volatile stocks in the market this year, Transocean (NYSE:RIG) is actually up on a year-to-date basis. Indeed, being among the few stocks in the green thus far this year has already raised the profile of RIG stock among many investors.
Today, Transocean is once again on the move higher, surging 18% at the time of writing. This move comes as the company announced two big contracts for deep water drilling. These contracts were announced yesterday, and the market appears to be pricing these contracts in, and then some, today.
The company’s ultra-deepwater drillship, Deepwater Conqueror, will be working with a major oil operator on a drilling program in the U.S. Gulf of Mexico. This contract, which totals $321 million, bolsters Transocean’s backlog substantially.
However, an even bigger contract, worth $915 million, was also signed yesterday. This contract will bring another one of the company’s ultra-deepwater drillships, the Petrobras 10000, to an offshore Brazilian drill site. This contract spans more than five years, and involves work with a national oil company in Brazil.
Let’s dive into why investors are growing so bullish on Transocean today, given this news.
RIG Stock Soars on Contract Announcements
As a key international provider of offshore drilling services, Transocean has seen its stock price surge of late. Higher oil prices inherently means drilling activity becomes more profitable. Indeed, if there was ever a time to expand production, it’s now. Accordingly, interest in RIG stock remains high as a leveraged play on this space.
However, with oil prices dipping below $100 per barrel recently, some of the luster RIG stock provided has been lost. Questions of whether a recession could dampen demand, and bring oil prices in line with historical levels, remain. These are headwinds which have been priced in of late.
That said, yesterday’s massive contracts signal demand for the drilling of new wells isn’t gone. In fact, this demand appears strong. And with a backlog increase of more than $1.2 billion, Transocean’s valuation of only $2.6 billion (after today’s rise) certainly seems attractive.
Transocean certainly seems like a cheap way to gain leverage to commodity prices. Whether investors want to take on such a position right now remains to be seen. However, the company’s valuation relative to its cash flow potential hasn’t been this good in some time. Accordingly, investors may want to take a look at this stock.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.