Is Transocean LTD (RIG) As Good A Buy As Bankers Say?

Transocean’s peers include Seadrill Ltd (NYSE:SDRL), ENSCO PLC (NYSE:ESV), Noble Corporation (NYSE:NE), and Diamond Offshore Drilling Inc (NYSE:DO). ENSCO and Diamond are actually close to value status in terms of their trailing earnings, with P/Es of 11 and 13 in those terms respectively. With the sell-side being bullish on offshore drilling overall, significant earnings growth is expected at these two companies as well and so their PEG ratios are also each less than 1. Diamond experienced a decline in revenue and earnings in its most recent quarter compared to the same period in the previous year, while ENSCO did considerably better; that company also pays a dividend yield of 3.5%, and seems like it would be worthy of further research.

Sea-Drill is actually a very high-yield stock, with its quarterly dividend payments of over 80 cents per share resulting in a yield of about 9%. It is valued at 17 times trailing earnings; note that this means that the company’s payout ratio is over 100%, and so we aren’t sure how sustainable its current dividend would be. Noble also features a trailing P/E of 17, though analysts are expecting higher earnings growth there than at Sea-Drill. In fact, the stock boasts a forward earnings multiple of 8 which is in line with where Transocean is valued. Revenue and earnings were each up about 25% in the first quarter of 2013 versus a year earlier.

We consider offshore drilling to be a pretty interesting industry: of the five companies we’ve mentioned here, two are fairly cheap in terms of their current business, two have annual dividend yields of over 4%, and the remaining one has been delivering quite high growth and is valued at less than 20 times its trailing earnings. As such we think that value or income investors could identify multiple prospects in the space. The flip side of this, however, is that Transocean does not seem as generous on the dividend front as Sea-Drill and might not be as good a buy as some of its peers from a value perspective given how dependent it is on future EPS growth.

Disclosure: I own no shares of any stocks mentioned in this article.