Is Transocean a Good Stock to Buy?

Transocean LTD (NYSE:RIG) had actually recovered nearly all of its losses from the Deepwater Horizon disaster in early 2011, but has since slumped. While the stock is up 14% so far this year, about even with the S&P 500, it is down about 27% over the last two years while the index has risen by about the same percentage.

Higher drilling activity brought Transocean’s revenues up 10% in the second quarter of the year compared to the same period in 2011; this was about in line with the improvement that the company saw in the first quarter. While dayrates were slightly down, utilization was up significantly. However, steep operating and maintenance costs caused Transocean to veer into unprofitability versus the positive earnings it had posted during the first half of last year. Cash flow from operations improved because of changes in working capital, but overall we do not feel particularly positive about where the company currently stands.

BP CAPITAL

Transocean LTD trades at 10 times forward earnings estimates, as Wall Street analyst consensus is for the company to generate $4.46 in earnings per share next year. That represents a large increase from what it is expected to report this year, so we think the value status this multiple implies could be deceptive. With Gulf activity still a bit questionable going forward, we would say that oil prices would have to rise- despite heavy onshore activity in U.S. shale fields- in order to drive up demand for contract drilling operations.

Transocean was oil billionaire T. Boone Pickens’s largest holding in its 13F portfolio at the end of June, as BP Capital reported owning about 230,000 shares of the stock (find more stocks that T. Boone Pickens liked). Steve Cohen’s SAC Capital Advisors also liked Transocean LTD during the second quarter, adding shares for a total of 3.5 million shares (research more stocks that SAC owned). Carlson Capital, managed by Clint Carlson, nearly doubled its own stake, closing June with 1.7 million shares of the stock in its portfolio (see more stock picks from Carlson Capital).

ENSCO plc (NYSE:ESV), Seadrill Ltd (NYSE:SDRL), Noble Corporation (NYSE:NE), and Pacific Drilling SA (NYSE:PACD) are four offshore drilling rig operators that we think make for good peers for Transocean. There’s considerable variation among these companies’ P/E multiples, but the sell-side generally agrees that they, like Transocean, are going to see high earnings growth next year- in each case the forward earnings multiple is well below the figure tied to trailing earnings. ENSCO and Noble both trade at 8 times forward estimates, a slight discount to Transocean, but we’d consider Transocean the market leader in the industry and its market capitalization is somewhat higher than these two peers. ENSCO and Noble, however, have been experiencing very strong growth in revenue- up 90% and 44% last quarter versus a year ago, respectively- which has also bled through to their bottom lines. These companies may make better buys than Transocean, and also lack the stigma (and continuing legal troubles) of being associated with Deepwater Horizon.

Seadrill is a bit more expensive than these companies on a forward basis, at 11 times estimated earnings for 2013. The bullishness from analyst continues in full throat here- the five-year PEG ratio at Seadrill is a remarkably low 0.4- so if an investor is going to take their estimates on faith Seadrill is quite cheap. However, we are not sure that quite this much optimism is warranted, and might prefer a company which requires less growth in order to justify its valuation. Pacific Drilling is by far the smallest of these offshore drillers, at a market cap of $2.2 billion. According to analyst projections it is also the most expensive, carrying a forward P/E of 21.We don’t see anything particularly attractive in its business or financials, and so we’d avoid it as well.

Transocean is recovering, and if it can meet expectations than it will end up being a good value and have substantial upside from any rises in oil prices that occur over the next several years. However, our overview is that Ensco or Noble might be safer picks and should deliver similar value to Transocean in any given macro scenario.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!