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Citi also initiated coverage on peers Noble Corp (NYSE:NE) and Valaris Ltd (NYSE:VAL) with Buy ratings and price targets of $64 and $85, respectively, and Seadrill Ltd (NYSE:SDRL) was initiated at Neutral.
The overall positive view was based on the belief that there will be an extended period of significant growth and activity in the offshore drilling industry. While performance in the space has been strong, analysts think the stocks are still undervalued.
“The offshore rig markets have witnessed a swift recovery with floater day-rates up 3x from the bottom. While Driller stock performance has been robust, this reflects the group becoming investable again post-bankruptcy but not the full strength and duration of this upcycle,” said analysts.
Citi’s projections for operating profitability for the group are higher than consensus analyst estimates, and they think this will support strong shareholder returns.
Discussing Transocean, analysts said, “We shift to valuing Transocean on 2025 EBITDA as their contract book is expanding and the investment debate has shifted to this year. The 7x multiple is broadly in line with their long term average during the last offshore drilling upcycle and equates to a 17% FCF yield, which we believe is a reasonable target.”
On Noble, Citi stated, “We believe Noble’s stock is under-valued. The high-quality fleet, high backlog, and the ability to capture the day-rate increase is under appreciated by the market.”
Analysts had a similar view of Valaris, writing, “The high-quality fleet, high backlog, optionality to purchase 2 new stranded drill-ships, ability to capture the day-rate increase and 50% stake in Middle East focused ARO drilling are under appreciated by the market.”
Transocean’s stock climbed by over 5% following the upgrade. Noble and Valaris shares also gained.
