Transocean: Drilling For Profits

by: Leonard the Monkey June 10, 2008 | about stocks: PBR / RIG    

Leonard the Monkey

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Transocean (RIG) is a name I have started buying a little bit of as it has pulled back more than 12% off it's high as oil prices have continued there often called "parabolic rise". With all of the talk of peak oil and supply vs. demand issues I thought it sounded like a good idea to get in on a company that looks to lead the effort in finding new sources of oil.

As many of you I'm sure have heard Petrobras (PBR) has announced a huge oil find off the coast of Brazil which may be the biggest find in over 50 years. In order to exploit this new discovery they are said to be trying to tie up 80% of the known deep-water rigs on the planet. This bodes well for RIG as only 15 deep-water rigs between now and 2010 will be available including new constructs and RIG owns 7 of those.

RIG is fueling it's growth with the increasing day rates for it's products which include:

  • 39 High-Spec floaters (ultra-deepwater semi submersibles and drill ships)
  • 29 Mid-water Floaters
  • 10 High-Spec Jackups
  • 56 Standard Jackups
  • 4 other rigs
  • 9 Ultra-Deepwater Floaters under construction or contracted for construction

They will only build new platforms if they have a contract in hand and it can take at least a couple of years to complete a large deepwater rig, also many of the rigs they currently have are contracted out for 3 to 5 years. This means that the company will not likely experience any short term explosive growth but with the current 34 billion dollar backlog and a PE under 10 that they are value priced with almost a certainty of continued growth in business. They are projecting eps growth of 18% over the coming year after achieving 67% growth over the previous year.

RIG looks like it is consolidating a bit. If it breaks down I will look to add at the 200 day around $131.57 On the other hand if it breaks up I will be looking to add on move above $163.00 The PEG ratio of this company is .6 assuming a 15% growth rate over the next 5 years which I believe will be achievable if not significantly surpassed through orders for new rigs and increasing day rates as companies go after oil that is located in the 70% of the world that has hardly been explored, the ocean.

With this huge PBR find it is very encouraging that more companies will find success in the deep waters. Now of course if this happens oil supply will be more likely to meet with future demand thereby helping to stem the rise in oil prices and therefore day rates but it seems to me logical that RIG's deepwater rig building segment will be able to pick up the slack justifying that oh so mighty PE of under 10.

I think RIG is prime positioned to continue to have success for many years to come and while shares have risen 54% in the last 52 weeks I still do not believe they reflect the oil situation we currently find ourselves in. To be honest I didn't feel oil would move like this and the end of last week really just left me in awe. Oil may go back down to $75 a barrel but I now feel that won't be until the world starts a massive drilling movement in places that at cheap oil prices were deemed to difficult or to expensive to get to. RIG is and will continue to benefit from this shift.

Disclosure: long RIG

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This article has 14 comments:

  •  
    Jun 10 01:49 PM
    Good article Leanord, I agree completely. I cant understand how RIG is selling so cheap.
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  •  
    Jun 10 02:29 PM
    Very good article. I have held this stock since Cramer recommended it on Mad Money. It and NOV are probably 2 of the best stocks to own for the long term. This stock may never see $131 again so a pull back to anything from $135 to $140 would be a great buying opportunity.
    There are very few oil related companies that will beat this one.
    Reply | Link to Comment
  •  
    Jun 10 03:29 PM
    I purchased a few shares of RIG this morning when I saw it was down over $2. I have the same thought about buying more if it dips further. I can't think of a better way to play oil than with the leading driller.
    Reply | Link to Comment
  •  
    Jun 10 03:42 PM
    I agree with User 151634. rig and nov are 2 of the best stocks to own long term. Deep water blog: oilismastery.blogspot..../
    Reply | Link to Comment
  •  
    Jun 10 05:13 PM
    Be patient, buy the pullbacks. This is a longer term story. Great performer, but multiple expansion ahead for this group. Take advantage of oil volitility to buy this one. Best stock I've owed for several years.
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  •  
    Jun 10 05:14 PM
    Did i say "owed?", I meant, obviously, owned.
    Reply | Link to Comment
  •  
    Jun 10 07:02 PM
    Thanks ace22 and User 151634.

    Looks like we all agree on this one! Unless oil falls off a cliff and stays there I think the dips have to be bought.
    Reply | Link to Comment
  •  
    Jun 11 04:49 AM
    I am a bull on these and puzzled. Why isn't the market rewarding the drillers? What could be the bear case for drillers if oil remains above and around $100?
    Reply | Link to Comment
  •  
    Jun 11 08:33 AM
    Gaurav,
    Be patient! I am a long term holder of offshore drillers. Take Ensco for example, it was on Merrill Lynch's Conviction Sell and was lagging RIG for almost a year, but fundamentals prevailed. It is one of the cheapest with strongest balance sheet amongst drillers. RIG is now dirt cheap considering very solid backlog at $34 billion. The latest June operations report showed considerable jumped in two contract rates.
    Be patient. Not many companies have such tail wind.
    Reply | Link to Comment
  •  
    Jun 11 11:11 AM
    One more point in RIG's favor: building new drillships is onerous enough. But finding and developing the on-rig talent to keep these things working safely 24/7 is a huge problem for every driller. Both RIG and DO are way in front on this, and have several campuses around the world to train new staff. Will some get picked off by others? sure. But that deep pool of talent is going to be just as valuable as the platforms themselves in the decades to come. I have been sitting on these stocks since 2006 and see no reason to budge now.
    Reply | Link to Comment
  •  
    Jun 11 07:28 PM
    Good call on ESV oildriller. It was asleep for a long time and upgrades have been coming.
    Reply | Link to Comment
  •  
    Jun 11 11:03 PM
    All these positive comments are scary in its unison. One big storm wiping out an entire rig and killing the crew will take the stock below 100. This is a tough/risky business. Thanks to 'Thinking Ahead' for pointing out their commitment to training and human reserve development. I am a holder of rig for the past 2 yrs. and do not plan to sell anytime soon. But always - beware!
    Reply | Link to Comment
  •  
    Jun 11 11:39 PM
    Leonard, wonderful article. Refreshing for it's lack of hyperbole. The statistic you mentioned about RIG having 7 of the 15 deep-water rigs that will be available between now and 2010 was especially interesting. These rigs are badly needed in Brazilian and Mexican waters, if not elsewhere. I suspect they will be contracted for excellent rates.

    One thing you did not mention, which I think would have been worthy of mention, is the recent depth record in Qatar - something like 40,000 feet of reach drilled without incident in 36 days! What an advertisement for "getting-what-you... !

    To Startouch, I would hope that crews are routinely evacuated before killer storms arrive. If so, the loss of one rig would be bad for any company, but the vast size of Transocean would hopefully allow them to weather such a loss somewhat better than their smaller competitors.
    Reply | Link to Comment
  •  
    Jun 12 01:37 PM
    Nice and Agree. Rig is a favorite for a very long time and willl be going up...just watch
    Reply | Link to Comment
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