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.

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 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!