I like Carl Icahn (Trades, Portfolio). I like him more than Warren Buffett even, because I don’t think he’s trying hard to impress you. And, let’s face it, he’s been an investor his whole life with no underlying profit generator to fall back on. Every decision he makes is binary - win or lose - and he’s been on the right side most of the time. That’s why he's worth $22 billion.
A bargain stock that Carl has been interested in for a while is Transocean (RIG, Financial).
Icahn owns over 21 million shares (close to 6%) of the common stock.
Transocean is the world's largest offshore driller, with the most comprehensive fleet of rigs in the industry. The Company has two operating segments: contract drilling services and drilling management services.
Icahn has pushed for the company to cut $800 million in costs, raise its dividend and consider creating a master limited partnership. An MLP would enhance the company's financial flexibility and allow for more productive and efficient operations.
Currently, the company generates close to $9 billion in revenue and before impairment charges had $3.80 billion in EBITA with a 30% operating margin.
The industry is very depressed right now with oil per barrel down 50% in 9 months and despite a history of financial success, RIG is priced at its lowest level in more than a decade. Yet compared to its closest competitor, Diamond Offshore, Transocean generates a lot more from it’s fleet at can go to a greater depth to drill, which is where the risk reward comes in.
The following photos are from their latest fleet status report. See the bottom of this article for the direct link to the report.
These new rigs drill from 35,000 to 40,000 feet in as little as 400 ft of water. The last 5 on the list are what's known as Jackup rigs, and they usually get a far lower day rate than the floaters. Collectively, this new group, once contracted out should bring in north of $5 million a day in revenue.
These are RIG's biggest and baddest Ultra-Deepwater floaters, bringing into the company a collective $12 million a day. This makes up approximately 50% of RIG's revenues.
RIG's website is deepwater.com for a reason. That's what the company specializes in, deep water drilling. This group gives the firm over $2 million in revenue every day.
Drilling for oil is not an easy task. It gets really hard when you want to do it in harsh environments, which is why this group is bringing $10 million a day collectively.
$8 million a day from this segment of midwater floaters.
Finally, the current High Spec Jackups sit in 400 ft and drill down into 30,000+ feet. This segment brings in $2.5 million a day.
Hopefully, the new $5 million rigs will be (again, hopefully) more profitable than the ones Transocean is retiring at the end of the year, and make up for the revenue stall in the last few years.
The first question is: Will the company die?
The shorts think so, with more than 32% of the float, but that’s built up a short ratio of 11.20. That is, Shares Short ÷ Average Daily Trading Volume. This means, that either it’ll take 11 days to unwind the position, hence 11 days of profitable trading days, or a spike in the price if they start buying back aggressively.
More importantly, it seems like when the short interest builds in good companies, the smart money takes the opposite position and in RIG there are a few super investors to help investors believe in the potential of profit with the stock.
Joel Greenblatt (Trades, Portfolio) (with 836k shares), George Soros (Trades, Portfolio) (with 149k shares), and Icahn (with 21 mil shares) all have a position.
Plus, did you see the contracts from the fleet status. Unless each of those big name oil companies go bankrupt, RIG has a pretty steady stream of cash coming in.
The second question is: Will it be profitable again?
This is all that matters to investors at this point. Surviving Icahn and taking 19 or more rigs offline in 2015 should help the company get back to net profits. Again, take out the impairment charges and it’s a different story right now. Transocean is still generating over $2 billion in cash a year, and to me the stock is deeply discounted at these levels.
Maybe Icahn is onto to something with the flexibility of the MLP, but If nothing else RIG should be a flyer in the portfolio. At this price, which Icahn owns at much higher levels, is a bargain.
Supplementals:
RIG’s fleet status - http://www.deepwater.com/investor-relations/fleet-status-report
RIG’s 10k - http://www.deepwater.com/investor-relations/financial-reports
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