Hello and welcome, Motley Fool readers. If you weren’t familiar with Carl Icahn before last week, you probably are aware of him now given the high-profile spat on CNBC between Icahn and fellow billionaire Bill Ackman. CNBC’s approval rating among viewers is at the lowest level since 2005, so maybe the Icahn/Ackman lunch hour soapbox is just what the network needed.
In any event, Icahn reported on January 13 that he had begun to accumulate shares of Transocean LTD (NYSE:RIG), a Switzerland-based entity that provides offshore contract drilling services for oil and gas wells.
My initial encounter with Transocean occurred in the weeks following the Deepwater Horizon tragedy. The stock had fallen from a high of $90 in April 2010 to a low of $46 in early June 2010. Shares traded as high as $150 in summer 2008 when the world economy endured record oil prices.
For those who aren’t aware, Deepwater Horizon is the actual name of the oil rig owned by Transocean, which entered into a long-term lease with BP from 2001 through September 2013. I followed value investor Karen Finerman’s advice to step in and buy calls on the stock in May 2010, believing the knee-jerk selloff had been overdone. Both of us were wrong, and the calls expired worthless.
Let’s fast forward to January 2013, and Transocean has announced a firm $1.4 billion settlement with the U.S. Department of Justice. The settlement puts the potential for further legal action from DOJ in the rear-view mirror for shareholders. Clearly, the market sees the settlement as a huge positive, as the amount of overhang on the stock is quickly disappearing. Shares of Transocean have rallied a massive 27% from Wednesday, January 2 through Friday, January 25.
Is the stock still worth buying at current levels? Let’s dive in and take a closer look.
Ancillary Plays in Offshore Drilling
Transocean owns the world’s largest offshore drilling fleet, but it’s not alone in the oil well services industry. The Houston, Texas based Diamond Offshore Drilling, Inc. (NYSE:DO) owns 49 offshore rigs, mainly off the coast of Brazil and in the Gulf of Mexico. DO received a downgrade to Neutral from Outperform at Credit Suisse on January 22, as the company receives a substantial amount of business from Brazilian oil giant Petrobras Argentina SA (NYSE:PZE). This South American customer recently announced significant cuts to capital expenditure for offshore drilling. Noble Energy, Inc. (NYSE:NBL), which also operates offshore rigs near Brazil, is being hurt by Petrobras’ actions as well. I believe Transocean is more attractive for readers than either Diamond Offshore or Noble Energy.
For investors looking for small-cap speculation, shares of Hercules Offshore, Inc. (NASDAQ:HERO) have risen 50% in the last 52 weeks, with a substantial portion of the gains coming in recent months. This $1 billion dollar company provides independent shallow-water drilling to the oil and gas industry within the Gulf of Mexico. The stock has risen as confidence is being restored to drill in the Gulf, particularly in underexplored shallow-water areas. The mean (average) price target on HERO is slightly above $7, while the highest target on Wall Street is all the way up at $11.
Foolish Bottom Line
Despite the recent run in shares, Transocean is still extremely attractive. The company has positive earnings momentum and with the U.S. government off its back, shares are the cheapest they’ve been in five years.
Furthermore, does anyone remember when Carl Icahn went on CNBC in fall 2012, stating he was buying shares of Netflix, Inc. (NASDAQ:NFLX)because the stock was undervalued? Both Karen Finerman and I were wrong then, too. The stock has rallied more than 100 points from a low of $60 in late October when Icahn went on TV. Finerman recommended that viewers “Sell Netflix” as her Final Trade on October 31 due to the seemingly high valuation, and I agreed by default as I do not watch enough television to give an investment in Netflix further consideration.
In conclusion, readers are presented with a fresh opportunity for the 2013 calendar year. I recommend that investors heed Carl Icahn’s advice this time around and consider buying Transocean. I own shares of the company in my individual and managed accounts.
Transocean is scheduled to release fourth quarter 2012 earnings during the week of February 24, 2012. The specific date and time have yet to be announced.
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The article Should You Follow Carl Icahn into Transocean's Deep Waters? originally appeared on Fool.com and is written by John Macris.
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