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.

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 World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

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

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!