Transocean Drills Deep For Success

8/31/2009


  Recent Price
$77
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
6
  Shares (millions)
321
  Long-Term Debt as % of Capital
36%
  52-Week Price Range
$132.41 - $41.95

Owning the world’s largest fleet of offshore drilling rigs, Transocean ($77; RIG) has more deepwater exposure than anyone else in the industry. Transocean’s average daily rig rental rate rose 10% to $256,200 in the first half of 2009 on the strength of deepwater contracts. However, fleet utilization has declined, principally because of the weak market for jack-ups, shallow-water rigs that stand on the ocean floor. Roughly half of the company’s 133 rigs are jack-ups.

The stock has jumped 63% this year, even though consensus estimates project lower sales and per-share profits in 2009 and 2010. Wall Street expects earnings to rise at a 20% annual rate over the next five years, helped by 10 new ultra-deepwater rigs poised to start drilling by 2012. Transocean, trading at less than eight times the lowest Wall Street estimate for 2010 earnings, is a Focus List Buy and a Long-Term Buy.

Deep play pays off

High-specification floaters are designed to operate in unusually harsh environments, or at depths of up to 10,000 feet. These rigs represent less than a third of Transocean’s fleet but account for 80% of the contract backlog and about 50% of contract-drilling revenue.

Transocean continues to sign deepwater deals, and day rates remain near historical highs. In July, the company secured a three-year contract with Brazilian oil giant Petrobras ($43; PBR) for an ultra-deepwater rig with an average day rate of $510,000, 4% above the rig’s current contract. A newly completed ultra-deepwater rig also started operating for Chevron ($71; CVX) in August. As of Aug. 3, Transocean had commitments for 89% of the days in 2010 for its high-specification floaters.

Jack-ups stack up

In April, Transocean forecasted a decline in market conditions for shallow-water rigs. But the situation has degraded more than the company projected. Transocean has stacked 15 idle jack-ups, up from three at the end of 2008. Stacking, or taking rigs out of service, cuts salary and other operating costs. Prospects for upcoming contracts are not encouraging — the jack-up fleet is only 58% committed for the rest of this year and 31% for 2010.

The outlook for midwater (400 feet to 4,500 feet) is slightly better, but this market also shows signs of weakness. Five midwater rigs are stacked, and three more will complete work in coming months without new contracts lined up. Transocean reached a tentative deal to sell two midwater rigs. However, the sale price of $200 million is disappointing, considering Transocean had reached a deal worth $750 million before the financing fell apart last year.

Conclusion

The backlog stands at $33.7 billion, down 15% from the end of December, and it will probably erode further in coming quarters. Looking ahead, Petrobras could announce bid requirements for another round of projects by the end of 2009.

Shares trade at just six times trailing earnings, less than half the three-year average of 13. Earning a Quadrix® Value score of 99, the stock is also priced at less than half of the three-year averages for price/book and price/cash flow ratios. An annual report for Transocean Inc. is available at 4 Greenway Plaza, Houston, Texas, 77046; (713) 232-7500; www.deepwater.com.

 

TRANSOCEAN
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $2.79 vs. $3.40 - 7% $85.57 -

$56.75

6 - 4
Mar '09 3.75 vs. 3.81 + 0% 67.17 - 46.11 5 - 3
Dec '08 3.69 vs. 2.83 + 57% 109.16 - 41.95 8 - 3
Sep '08 3.43 vs.

2.14

+ 108% 154.50 - 105.16 13 - 9
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $12.67 $14.33 $0.00 $163.00
-
$41.95 11 - 3
2007 $6.38 $8.58 $0.00 187.98
-
103.59 22 - 12
2006 $3.88 $2.94 $0.00 128.87
-
92.22 44 - 31
2005 $2.89 $1.57 $0.00 101.39
-
56.88 65 - 36
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
86 51 99 93 75 11 25

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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