Transocean Earnings Review
Repost of a blog I did for the Strategy Lab Open.
Unless otherwise noted all quotes from the earnings call are from the transcript posted at SeekingAlpha.com, a great free source.
Transocean (RIG) reported 4th quarter 2007 earnings on Feb 20th. This was the first earnings report since they completed a merger with former competitor Global SantaFe. For those not familiar with RIG, they are the largest offshore drilling company in the world. They own and operate drill rigs and drill ships that work under contract to oil companies. This is a very capital-intensive business, during the conference call questions, RIG executives estimated a new rig ordered today would be nearly three-quarters of a billion dollars. Contract rates for the ultra-deepwater drill ships run upwards of a half-million dollars a day.
In the opening segment of the call, CEO Robert Long stated that integration efforts with the Global SantaFe merger are going well and "We also seem to be on track to achieve our goal of systems conversions by mid-year and are slightly ahead of our original targets on synergy savings."
One of RIG's strengths is a solid order backlog and that's continuing. They're started to get contracts and extensions on existing rigs for 2010 and out. Mr. Long gave some specific contract extensions they've landed and stated, "...interest in existing rigs with availability in 2010 has developed a bit faster than I expected and I think will accelerate as we get a little further into the year and we start to see some more of this capacity committed." Sr. VP of Marketing & Planning David Mullen stated this was, "... a very busy period in contract activity since the last earnings call with a number of contract commitments on the existing fleet with start dates in 2010."
New build interest is also good, Mr. Mullen stated, "We continue to see a lot of customer interest in new build opportunities and I expect in the coming quarters that a number of these will translate in to commitments." RIG policy is to avoid building rigs on speculation and expand the fleet only when there is contracted work available for new units. Oil companies are turning more and more to deep water, like the big discovery offshore in Brazil, to replace their reserves. That's very good news for Transocean.
The RIG - GSF merger included a cash payout to shareholders that was financed with a $15 billion bridge loan. Between convertible issues, bank loans and cash from operations "by the third quarter the bridge will be totally paid off," according to Greg Cauthen, the CFO.
The stock looks cheap-to-reasonable on fundamentals. Yahoo Finance shows a forward PE of 10.2, PEG of 0.64. Those numbers haven't been updated to the latest quarter yet. RIG doesn't pay a dividend. The solid, multi-year backlog makes the earnings fairly reliable and there's a huge barrier to entry for new competition. The order books at yards building drill rigs are full for several years and skilled crews to run the rigs are pretty much fully employed.
The stock popped by about seven dollars on the earnings report then pulled back a bit to close the week at just under 138. That's still off it's 52-week high of 149 and change from late December. The stock price is fairly volatile so there's a good chance of picking it up a little lower. Yahoo shows a consensus 12-month target of 155. I think that's low. If RIG hits earnings estimates and maintains its multiple, this stock could be trading near 200 by year end (2008 forecast earnings of 13.5, current ttm multiple of 15).
About the only bear argument I can come up with is that there aren't many bears on RIG. Yahoo's analyst opinion page shows 16 strong buys, 9 buys, 9 holds, 2 under performs and no sells. On CAPS, 2400 players believe RIG will outperform the S&P 500 vs. 48 that think it will underperform. With that much bullish consensus, new buyer's for the stock may be tough to find.
Disclosure - I have a small position in RIG.