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Should you buy a collapesd bridge? / Selling India / Big RIG



July 16, 2008 – Comments (5) | RELATED TICKERS: CBI , RIG

It's amazing what a slight, two-day drop in the price of oil will do for the overall market.  I sure am glad that I covered most of my shorts late last week and early this week.  Despite today's positive action it seems like investors can't catch a break these days.  The market doesn't like surprises right now and that is exactly what it got from Chicago Bridge and Iron (CBI) last night. CBI was hammered after announcing that it will once again have to take charges for the construction of its UK LNG projects, mainly the one at South Hook. The same thing happened last quarter, but with the projects nearing completion I was hoping that the problems were behind us.

Unfortunately it does not appear as though that is the case. A $317 million, $2.38/share charge isn't exactly chump change either. Yuck. CBI should definitely fire whoever is running these projects and whoever signed the initial contract for them. They have almost single-handedly taken the company's stock down from the $60 that it was trading at not that long ago to the $28.90 that it is sitting at right now.

The most disturbing aspect of these charges is this quote from the press release, "The project charges will cause CB&I to be out of compliance with its lender agreements. The company believes that based on the strength of its backlog and solid financial condition, it will successfully obtain the necessary amendments."

Is this a buying opportunity? I'm very tempted to say yes. As long as the lender issue can be straightened out quickly, this is nothing more than a continuation of known problems at two (mostly one) projects. It is certainly annoying and disappointing that CBI management can't seem to get these LNG projects right and as a result it keeps missing earnings estimates, but the rest of its business appears to be very strong.

CBI still expects to earn $0.40 to $0.60/share in 2008. This is fairly close to the $0.58 that analysts were looking for before this announcement. In response to the problems at these projects, CBI is making an effort to switch its future deals away from lump-sum contracts. During the past year, CBI has been able to adjust its portfolio mix from approximately 90% higher-risk projects to only 55%. It hopes to get this number down to 20% - 25% by the end of 2009. Hopefully this will protect it from any similar problems in the future.

CB&I Pre-announces Second Quarter Loss on Two UK Projects

Damn you South Hook


I came across a great article in the Economist a couple of weeks ago that explained why India's economy is in trouble.  Conventional wisdom dictates that the currencies of countries which have large current-account deficits (they import more stuff that the export...sound familiar?) fall in value relative to the currencies of countries that have current-account surpluses.  This is one of the major reasons why the value of the dollar has steadily dropped since 2002.  Well, India's current-account deficit has been steadily rising.  Analysts expect it to grow to 4% of India's GDP this year and to 5.5% next year. 

The two main reasons why analysts expect it to rise are the high cost of oil, which India imports a ton of, and a drop in the revenue of Indian IT firms (40% of which came from the battered financial industry last year).  The Indian rupee has slid by nearly 10% versus the U.S. dollar since late last year and analysts are looking for it to slide another 9% by March 2009.  If your currency is sliding in relation to the lowly U.S. dollar then you know you've got problems.  The falling rupee has made inflation that is high everywhere in the world even worse in India.  In response to this high inflation, India has raised interest rates...which serves to slow the growth that investors crave.  It is a vicious cycle that is not good for India. 

I never had a huge investment position in India, but after conducting research on why India has been having problems lately I personally have sold all of my Indian stocks.  Amongst BRIC countries, I prefer Brazil and China to India.


It blows my mind that the shares of Transocean (RIG) have dropped from the $160 level that they were at back in May to today's $143 and change when it keeps announcing richer and longer new rig contracts on a weekly basis.  Once again, it announced a monster new contract yesterday (press release: Transocean Inc. Announces Petrobras Approval of Contracts for Four Brazil-based Rigs) and once again its stock is down today.  This latest deal for two deepwater and two midwater rigs represents 22 years of rig use and $3 billion in revenue for Transocean. 

RIG has unbelievable earnings visibility and a backlog of over $30 billion!  It currently sports a P/E ratio of just over 9 and it is about to report a gangbuster quarter that will cause its P/E to fall even further.  Sure the price of oil has slid dramatically over the past two days, but the short-term fluctuation of oil mean nothing to a company like this.  RIG has been a very frustrating stock lately, but I have absolutely no doubt that it will eventually be a big winner.

Long CBI (grumble, grumble) & RIG

5 Comments – Post Your Own

#1) On July 16, 2008 at 1:49 PM, wolfhounds (32.84) wrote:

Hey Deej, be thankful for fear. I sold RIG at 153, bought back at 143 and buying Leaps today if I can.

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#2) On July 16, 2008 at 2:13 PM, TMFDeej (98.37) wrote:

Very true, wolf.  The current market environment is providing us with tremendous values.


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#3) On July 16, 2008 at 2:49 PM, Tastylunch (28.76) wrote:


I thought this might happen based off what I saw from mutual funds back in late may and june. According to a site  I check

RIG was the most acquired stock by mutual funds at the time and one of the most widely held. That made me wonder who was left to buy it to help continue to propel it upwards. I agree with you and Wolf this is a good long term buy in opportunity.

Gotta love Bear markets and the values they produce. Report this comment
#4) On July 16, 2008 at 3:19 PM, anchak (99.89) wrote:

I bought into RIG.... I do not have a choice personally with India....but cant fault your logic...Majority of my US-denominated India exposure is thru T Rowe Price's New Asia Fund - I trust their judgment in moving things out to other parts of South East Asia if things look bad.

However there will be some balancing factors - with Consumer consumption, Infrastructure etc doing well. I think India will also experience a min-Credit downturn as rising rates curb lending and force defaults.

Do you think FXI is a value?

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#5) On July 17, 2008 at 12:50 PM, GS751 (26.96) wrote:

As with many other things I would rather leave money on the table with CBI and wait until they are more in the clear than have them try and bottom fish.  I own a little RIG also. 

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