Transocean stock is even more attractive following the Valaris deal

Transocean’s debt load has declined but the most important piece of news has so far been that of Transocean acquiring Valaris (VAL), its fellow offshore driller, that has been reporting positive profitability and is virtually free of debt. In this article, I will analyze what the future has in store for Transocean following the last transaction.  

Valaris acquisition

The Valaris acquisition deal would close in the second half of this year. As a consequence, Transocean’s backlog will increase to $10 billion, thus making the company by far the largest offshore driller. This is essential for the company, given the fact that Transocean’s backlog has been declining for several quarters in a row. The last time when RIG’s backlog was close to $10 billion was in 2024, in 2020 and 2017 respectively.  

Transocean’s backlog (the data are given in $million)

As I have mentioned above, the recently reported backlog only totaled $6.1 billion, so the transaction would raise it by a whopping 70%.

Also, this acquisition will be an all-share deal. This means that the transaction will be totally free of debt. In addition to that, Transocean’s liabilities would decline, while its liquidity would increase. This could be seen from the management’s earnings call presentation slide given below.

Right now Transocean’s net debt-to-EBITDA ratio is close to 3, which is generally considered to be acceptable, while in 2 years’ time it is expected to be 1.5. This figure is generally thought to be healthy or even low. According to Investopedia, a 1.5x net debt to EBITDA ratio normally means a strong investment-grade credit rating, often between BBB and A grade or Baa2/Baa1 by Moody’s. This level suggests low financial risk, and a company’s high ability to service its debt. Also, according to RIG’s CEO Keelan Adamson, Transocean might even start returning cash to the shareholders either in the form of dividends or as stock buybacks once this net debt –to-EBITDA ratio gets reached.

At the same time, even before the acquisition Transocean used to have a good long track record of debt reduction.

At its peak in 2019, RIG’s long-term debt was close to a whopping $10 billion. Now it is even below $5 billion.

Transocean’s long-term debt

But thanks to the deal, the debt will even decrease, also thanks to the greater free cash flows.

Also, between 2025 and 2026 Transocean alone would decrease its costs by a whopping $250 million. The cost savings from the transaction would total $200 million, which leaves us with total cost savings of $450 million. 

Let me also see how much that is in cost savings relative to Transocean’s last earnings results.

Transocean’s earnings

The company’s yearly adjusted EBITDA totaled $1.37 billion, while its free cash flow for the past year was $626 million. As RIG’s CEO said, “during the year, we materially strengthened the balance sheet, retiring about $1.3 billion in debt…These actions and the additional debt payments made in 2025 reduced our annual interest expense by nearly $90 million, enhanced our financial flexibility and increased the value of our equity currency, ultimately enabling the recently announced transaction with Valaris.” As I have mentioned above, Transocean does a great job deleveraging its balance sheet. But what does the $1.37 billion EBITDA mean in the context of Transocean’s earnings history? I have composed a table and a diagram summarizing RIG’s annual EBITDA and sales revenues as given by Seeking Alpha. Please note that the offshore driller has been recording negative net profits for a while due to the fact that it keeps scrapping its cold-stacked rigs.

Transocean’s annual EBITDA and sales histories (in $ million)

Source: Prepared by the author based on Seeking Alpha’s data

Transocean’s annual EBITDA and sales histories (in $ million)

As can be seen from both the table and the graph, Transocean’s EBITDA is near the level seen between 2016 and 2017. As for the company’s revenues, they are even higher than the figure seen in 2016.

Also, the cost savings of $450 million would be a substantial addition to Transocean’s operating income. As reported by Seeking Alpha, for 2025 it totaled $705 million, while the total other operating expenses were $854 million. Adding $450 million to the operating income of $705 million would give us $1155 million in operating income, a significant improvement of Transocean’s results.

Valuations

It has been often mentioned here on Seeking Alpha by my fellow analysts that RIG stock is overvalued. While my fellow analysts have done a great job by comparing Transocean’s EV/EBITDA ratio to these of its peers’, I will approach the problem from a slightly different angle.

The graph above shows Transocean’s stock price history. In 2016 when its annual sales were below the ones reported for 2025, the stock used to trade for more than $16 per share. Now the sales are higher but the stock is trading for $6.50 per share.

As for the combined company’s backlog, it would total $10 billion, near the levels seen in 2017 and 2019 when the stock traded for $16 and even $14 per share.

That is why based on the backlog, the sales revenues and stock price histories, I think that RIG shares are even undervalued at $6.50, especially given the fact that Transocean has become the offshore industry’s strong leader following the acquisition.

Risks

There are obviously risks to my bullish case. The first is the company’s debt. True, thanks to the management’s consistent deleveraging efforts, and also the acquisition that would decrease Transocean’s liabilities, Transocean’s debt has been continuously decreasing. This can be seen from the diagram given in the “Valaris acquisition” section. However, the offshore driller is still not as low-debt as many conservative investors would prefer it to be. For example, its credit rating is CCC+ as given by S&P Global, below investment-grade.

Moreover, Transocean has been reporting falling backlog for several quarters. Yet, this problem has been partially solved. As I have mentioned above, now the combined corporation’s backlog would be close to $10 billion, which makes the corporation the dominant market player in the offshore market.

But I would say the external risks are very important in the case of Transocean. The first and foremost is the oil prices. As I am writing this, crude is trading close to $66 per barrel, which makes it hard for Transocean’s clients to make very high profits. Still, if there are steady growth for the world economy and geopolitical events that would diminish the global crude supplies, this situation will change very fast, thus making volatile stocks like Transocean’s rise even further in value, thus making its shareholders record considerable gains. As I have just mentioned in the previous section, Transocean’s stock used to trade much higher than it is trading now. As the combined company’s management mentioned during the conference call, “we are at the beginning of a multiyear up cycle in offshore drilling”.

Conclusion

I fully support Transocean’s decision to acquire Valaris. This deal would raise the company’s backlog, improve liquidity, decrease the costs and the debt, thus adding further to Transocean’s stability and its sales potential. Also, Transocean reported great earnings that should improve further after the deal gets completed.