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Gurus Give Transocean a New Life

March 27, 2014 | About:

Accidents in the oil and gas industry due to negligence or human error have great costs. A company may go under due to an incident as its image is tarnished to the point of customers denying a return to normal business. Others, however, are too big to fail due to the quality service they provide. For example, the Exxon Valdez incident did not run Exxon out of business. The company’s image was tarnished, but responsible management recovered the company and today is the largest public traded firm. In that line, Transocean (RIG) is writing a similar story after the Deepwater Horizon incident in 2010. It is true that stock price has never recovered previous marks, but the company remains in business and one of the most competitive in the market. Last, many gurus began to purchase the stock with the hope of making a profit.

A Little Perspective

The Deepwater Horizon incident sent Transocean’s stock price tumbling to levels not seen since 2005. Declining revenues forced an adjustment of quarterly dividends, and operating margins have shown to be on a recovery after confirming the uptrend started a year ago. Cash flow, however, has declined again after displaying some stability between 2011 and 2012. Nonetheless, earnings per share have increased steadily since 2012, and projections expect it to continue the same path through 2014.

Most financial institutions have confirmed a negative view upon Transocean this week. Credit Suisse, JPMorgan Chase, UBS AG and Jefferies Group have lowered the target price for the stock to the lower $40s and even high $30s. On the other hand, analysts at Zacks and Citigroup have upgraded the stock’s rating to “Neutral,” while Braclays upgraded it to “Overweight.” Hence, opinion about future prospects for the company among financial institutions remain divided. All institutions, however, coincide on giving the stock a target price around the low $40s.

As it stands today, Transocean offers a great deal for the money. With a yield above 5% and a low face price, prospective shareholders can be collecting great rewards in the long term. Additionally, the stock trades at 10.5 times its trailing earnings, carrying a 13% discount to the industry average.

Quality Service and Market Trends

Transocean offers an unmatched technologically advanced and versatile offshore drilling fleet, supported by a strong backlog and considerable pricing power. At the same time, the company has made a great effort for reducing down time and simplified its business by selling the standard jackup fleet. Most importantly, the firm settled outstanding civil and criminal claims associated with the Deepwater Horizon incident, and turned its attention to reducing debt.

The strongest trend in the oil and gas industry is developing in the offshore segment. The argument is simple: Most onshore reserves have been discovered and required no new equipment. On the other hand, the ocean bed has not been fully exploited for fossil fuels, leaving a great window of opportunity and profit for companies like Transocean.

The competitive advantage held by the firm is counting with a reputation for the most technologically advance platforms for the job. A market positioning backed by a backlog that amounts to more than $28 billion, and counts oil giant Royal Dutch Shell, the only company with a project for a floating liquid natural gas platform. These characteristics confirm what everyone in the industry already knows: Transocean is too big and highly competitive to fail because of one incident.

With an annual dividend proposal of $3.00 per share, Transocean is all the more attractive to prospective shareholders. But what makes the stock irresistible is the company’s market-leading position in an industry that is rapidly expanding, in addition to a comparably cheap entry price and potential great rewards. It is there where the reason for so many new purchases by gurus throughout 2013 resides.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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