We recently published a list of 7 Best Oil Stocks under $20. In this article, we are going to take a look at where Transocean Ltd. (NYSE:RIG) stands against the other best oil stocks under $20.
The oil industry has long been criticized for its contributions to greenhouse gas emissions and global warming. Despite these concerns, oil remains a critical commodity in today’s world as it has historically played a pivotal role in the global industrial, household, and power sectors.
The dynamics of the oil market shifted dramatically two years ago following Russia’s invasion of Ukraine. Western sanctions on Russia, combined with efforts by European nations to reduce reliance on Russian crude, disrupted global supply chains and drove oil prices to record highs. As mentioned in our previous article ‘10 Best Oil Stocks Under $20’, prices soared to $119 per barrel in March 2023. The impact of sanctions remains, as Russia’s monthly revenue from seaborne crude oil registered a significant 15% decline in May 2024 compared to the previous month, as reported by The Centre for Research on Energy and Clean Air.
Demand and Supply in the Oil Market
According to the International Energy Agency, the global oil industry faces a challenging landscape, with slow demand growth coupled with supply chain disruptions. In the first half of 2024, the demand grew by just 800,000 barrels per day (kb/d), which is the slowest increase since 2020. The main contributor to this declining demand is the consistent drop in China’s consumption in the past four months. The trend in 2024 contrasts with the 2.1 million barrels per day (mb/d) surge in demand seen in 2023. The slowdown in China’s economy, combined with the shift towards electric vehicles, has driven the decline in global consumption.
On the other hand, the global supply increased in August by 80 kb/d, jumping to 103.5 mb/d. This surge was bolstered by high outputs from countries including Brazil and Guyana. This high demand balanced the production outages in Libya as well as maintenance-related slowdowns in Norway and Kazakhstan. However, OPEC+ countries are expected to face challenges, with supply projected at 810 kb/d by the end of 2024.
Although weaker-than-expected performance in China and falling margins in Europe are putting pressure on refinery activities, refinery output is expected to increase by 440 kb/d in 2024. Moreover, oil prices have declined, with Brent falling by over $10 per barrel in August and early September. This was mainly driven by concerns about Chinese demand, coupled with oversupply fears, according to IEA.
Despite challenging circumstances, companies are positioning themselves to align with shifting market dynamics. As a result, the crude oil industry is expected to surge at a compound annual growth rate (CAGR) of 1.8% until 2030, with an expected valuation of $1.6 trillion, according to Maximize Market Research.
Performance of Oil Stocks
Following the decline in oil prices, energy sector stocks have also delivered a mixed performance. The Energy sector surged by 13.3% on a year-to-date basis through July 2024. However, it still lagged behind the broader index by 3%. Thus, with a rapidly changing global scenario, energy sector stocks are expected to see swift movements in the near future.
Methodology
For this list, we scanned the Finviz screener and selected companies involved in the oil industry, focusing on areas relevant to oil production and its products. From that list, we selected companies with share prices under $20 as of September 24, 2024.
Among those, we chose seven companies with the highest number of hedge fund holdings and ranked them in ascending order based on these holdings, as of Q2 2024. Hedge fund data was sourced from Insider Monkey’s hedge fund database, which tracks the activity of 912 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of an oil rig with drillers in hard hats working on the platform.
Transocean Ltd. (NYSE:RIG)
Number of Hedge Funds Holders: 42
Share Price: $4.54
Transocean Ltd. (NYSE:RIG) is a leader in offshore drilling services, providing rigs, mobile units, and equipment to drill oil and gas wells worldwide. It operates a fleet of offshore drilling units, including ultra-deep and harsh environmental floaters, serving both integrated energy entities and government-owned companies.
Transocean Ltd. (NYSE:RIG) reported revenue of $861 million for Q2 2024, resulting in an adjusted EBITDA of $284 million. It delivered EBITDA margins of 33% for the quarter. The company posted a loss of $123 million, or $0.15 per share, for the quarter, due to delays in transitioning the Deepwater Atlas (Transocean’s drillship) to its higher 20K PSI (pounds per square inch) day rate and the delayed start of the KG1 in India, both of which negatively affected revenue. However, Transocean achieved 97% revenue efficiency for the quarter, attributed to strong fleet management, despite the challenges of mobilizing 40% of its fleet across multiple jurisdictions worldwide.
Furthermore, the company secured several new high-value contracts in the quarter, which bolsters growth prospects. Beacon Offshore awarded the Deepwater Atlas a two-well contract with a leading rate of $580,000 per day. This was further enhanced by a rate of $650,000 per day for advanced 20,000 PSI completions. In another milestone, BP signed a 3-year contract for Transocean’s Deepwater Invictus at $485,000 per day. These deals not only increase the contract backlog but also fill critical gaps in the company’s schedule, particularly in the U.S. Gulf region.
Despite securing new contracts, Transocean Ltd. (NYSE:RIG) faced operational challenges, such as delays in Deepwater Atlas transitioning to a high rate of 20k psi operations. This affected the company’s contracted revenues for the quarter. Moreover, a customer delay in the KG1 rig in India further reduced revenue. Thus, the company’s share price declined by 10% over the past month.
However, Transocean Ltd. (NYSE:RIG) countered these issues by commencing the Deepwater Aquila contract in Brazil to mitigate these setbacks. The company is also optimistic about its offshore drilling with contracts in Brazil and West Africa.
As of Q2 2024, 42 hedge funds have collectively invested $490 million in the company, according to Insider Monkey’s database, placing it on our list of the best energy stocks to buy.
Overall RIG ranks 3rd on our list of best oil stocks to buy under $20. While we acknowledge the potential of RIG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
