Transocean LTD (RIG): Finally Time To Buy This Oil Rig Contractor?

Just this past week, the Department of Justice approved Transocean’s $1 billion civil settlement, in addition to a $400 million settlement of criminal fines and penalties that was also recently approved.  As a condition of the settlement, Transocean also agreed to beef up its operational safety and emergency response capacities.

BP, on the other hand, has reached a settlement over its criminal fines; however, the civil trial is yet to begin.  While I do think that BP’s stock is undervalued at current levels, I cannot in good conscious recommend it as a long term investment until all of this drama is behind it.

Valuation/Competition

Now that the legal headaches are largely behind them, Transocean may be a buy again simply due to its valuation and growth potential.  When the company reports 2012’s earnings later this month, they are expected to have earned $3.48 per share for the year, meaning that the stock currently trades for 15.4 times earnings.

Earnings are expected to grow to $4.81 and $6.18 in 2013 and 2014, respectively, or annual growth rates of 38% and 28%, which more than justifies the valuation.  I believe that the company will continue to grow its earnings for the foreseeable future.  As the dust settles from the negative press that deepwater drilling has received over the past few years, I anticipate the backlog of business to grow significantly.

As far as competition, there is not much that is a real direct threat to Transocean due to its specialization in deepwater rigs, however one that is close is Diamond Offshore Drilling (NYSE:DO), which owns a fleet of 49 offshore rigs, the classifications of which are more diversified than Transocean’s with midwater, deepwater, and ultradeepwater rigs in its fleet.

Diamond trades at a slightly lower valuation of 14.5 times earnings, however are projected to have a lower forward growth rate of 10% annually for the next 3 years, according to consensus estimates.  Don’t get me wrong, I think Diamond is a fine investment; however Transocean is perceived by the market as riskier, and with greater risk comes greater potential reward.

Conclusion

With the depressed valuation due to both lower oil prices and the Deepwater Horizon disaster, Transocean looks like a buy right now.  Pretty much everyone agrees that the general direction of oil prices will be higher in the future; it’s just a matter of how long it takes and how high the prices go.  As oil supplies diminish over the coming decades, the big oil companies will have no choice but to contract more rigs and “drill, drill, drill”!

The article Finally Time To Buy This Oil Rig Contractor? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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 Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

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!