New Price Target for Transocean After $5.8 Billion Merger Resets Offshore Drilling

In the course of a merger, it’s not unusual for shares of the acquiring company to slide.

Netflix (NFLX)  is a good example of this phenomenon. Shares of the world’s largest streaming service have lost one-third of their value over the past six months, as markets anticipate the company’s planned merger with Warner Brothers Discovery (WBD) . 

However, when the merger is viewed positively by Wall Street, shares of the acquiring company can actually rise.

Such was the case on Monday, when shares of Transocean Ltd. (RIG)  gained nearly 6%. Switzerland-based Transocean, which specializes in offshore drilling for oil and gas, plans to merge with Bermuda-based Valaris Ltd. (VAL) , another offshore driller that primarily operates from the Houston, Texas area.

The news boosted Transocean to a six-month high. The move came on the stock’s highest turnover in four months, a sign of potential institutional involvement.

Transocean shares have now climbed 95% over the past six months. 

Meanwhile, shares of Valaris gained over 34% on the news. Both stocks closed near their highs of the day, an indication that both names could continue to rally. 

Transocean’s New Price Target

How high could shares of Transocean rise? Zooming out to the weekly chart, the next major resistance level is located near $8.60 (black horizontal line). That area of price action was created from June to September 2023. 

I’ll place my price target for Transocean just below that level, at $8.50. Based on Monday’s closing price, that’s a potential gain of nearly 50%. 

While an $8.50 price target and a potential 50% gain may seem aggressive, there are higher targets on Wall Street. BTIG Research recently raised its target for Transocean from $6 to $10,

Managing Risk

Does this news mean that investors should dive right into Transocean? Not so fast.

The company is scheduled to report earnings after the close on February 19. Traders who wish to own the stock could buy half of their normal-sized position now, and if appropriate, add half after next week’s earnings report.

Here’s Why Wall Street Approves

Transocean believes this deal will deliver $200 million in cost savings. The post-merger entity will be better positioned to meet rising off-shore demand. 

In recent years, bankruptcies and mergers have reduced the offshore drilling playing field. With 73 rigs, 33 ultra-deepwater drill ships, and 31 jackups (a mobile, bottom-supported unit with a buoyant hull and tubular legs), the newly-merged entity is expected to be an industry leader. The deal should be completed by the end of this year. 

At the time of publication, Ponsi was long RIG.