Transocean Ltd. (RIG) shares fell nearly 6% on Tuesday after the company announced the purchase of Songa Offshore SE for 9.1 billion Norwegian krone ($1.14 billion). Financed with equity and convertible bonds, the deal will dilute existing shareholders by 32% through the issuance of 128.2 million new shares – including convertible shares. The prospect of dilution caused shareholders to sell off Transocean stock during regular and after-hours trading.
The upshot is that industry consolidation means there may be a bottom in sight for the offshore drilling rig market, which has been hammered by low oil prices and a lack of demand. Transocean could benefit from an improved balance sheet and near-term liquidity while setting the stage for further consolidation in the offshore rig sector. This could translate to a bottom in the market and limited downside risk for investors. (See also: Transocean Breaks Even in Q2 Earnings, Revenues Beat.)
From a technical standpoint, the stock broke down from the pivot point at $8.45 to S1 support levels at $7.91 and briefly exceeded its reaction lows. The relative strength index (RSI) remains relatively neutral at 38.07, but the moving average convergence divergence (MACD) experienced a bearish crossover. This could signal a medium-term downtrend following the stock's largely positive movements since mid-June.
Traders will be closely watching for the stock to hold its lower trendline support just below S1 levels. A breakdown from these levels could signal the start of a renewed downtrend. If the stock rebounds, traders should watch for a move to pivot point and 50-day moving average levels or a possible breakout to retest R1 resistance at $9.20. Traders should maintain a bearish bias on the stock, however, given the recent trends. (For more, see: Seadrill vs. Transocean: Surviving Low Oil Prices.)
Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.