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.

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