Did Billionaire Carl Icahn Spot an Opportunity at Transocean?

Other drillers include SeaDrill Ltd (NYSE:SDRL), ENSCO PLC (NYSE:ESV), and Noble Corporation (NYSE:NE). Analysts are similarly bullish on these companies: Ensco and Noble actually trade at discounts to Transocean in terms of their 2013 earnings, which clock in at a P/E multiple of 9 in each case. Seadrill trades at 18 times trailing earnings, but its earnings were up enormously in Q3 2011 versus a year earlier and so we can understand why it is priced at a 2013 P/E of 12. SeaDrill and Ensco also boast PEG ratios in the same range as Transocean’s. The company is something of a market leader and does have particularly strong deepwater capabilities, but it doesn’t seem to be that cheap compared to its peers and of course Transocean might not be completely through with Deepwater Horizon issues. We can also compare the company to Petroleo Brasileiro Petrobras SA (NYSE:PBR); as an integrated Brazilian oil and gas company, Petrobras does quite a bit of drilling and oil production from deepwater and “ultra-deepwater” sources. After a 31% decline in price over the last year, the stock is valued at 8 times expected 2013 earnings, again a lower level than where Transocean trades.

At first glance, this doesn’t look like a particularly good move by Icahn. Transocean isn’t priced particularly low compared to its peers. In addition, while the industry as a whole is undervalued in terms of analyst estimates, and might prove to be a good source of value ideas (though even in that case Transocean doesn’t particularly stand out), taking a position in an offshore driller is dependent on oil prices and it’s possible that supply will remain high for the next few years.

Disclosure: I own no shares of any stocks mentioned in this article.