RIG Has 50% Upside on Multiple Catalysts

Transocean is a deep value stock with catalysts on the horizon. The stock pushes a 6% Dividend Yield and improving Balance Sheet. Limited risk with 50% plus upside.

Over the past several weeks we have seen multiple downgrades amongst the Sell-Side into earnings on Transocean. No surprise there are concerns over ultra deep water rates. Nothing new. All that is occurring is sellside estimates are coming down. Valuations remain compelling, catalysts have not changed. I would be a buyer on any weakness on earnings.

Transocean (RIG) is an offshore drilling company providing a variety of engineering and contract management services to the exploration sector. Transocean specializes in deep water oil- and natural gas wells and provides essential services to global energy firms tapping resources in harsh exploration environments. Transocean has operations across the world which spans from the Gulf of Mexico to Brazil and Venezuela in Latin America to the Caspian Sea and Australia. Transocean's service offering is top-in-class and many large-cap explorers outsource rig drilling jobs to the company. Despite a great drilling rig footprint around the world Transocean is one of the cheapest offshore drillers in the market with a valuation that is detached from its long-term prospects.

Investors have stayed away from RIG due to the BP spill in 2010. Nearly 4yrs later the stock is still down over 40% from their April 2010 highs. I believe the penalty is about to be lifted due to several internal & external catalysts.

(1) Carl Icahn could be the key to unlocking shareholder value. Several catalyst have emerged for 2014.

(2) Dividends will be raised to $3.00 share up from $2.25, New Dividend Yield 6.4%

(3) Proposed MLP in mid 2014 - Initial plan calls for 3-4 Rigs dropped into MLP by mid 14, Will add 1 additional RIG per year after launch. Characteristics are for High Spec Rigs, with longer term contracts with High Rated customers. Transocean plans to be majority shareholder in new entity. Will use proceeds for balance sheet improvements and debt repayment.

(4)Proposed cost savings of $800M by 2015.

(5) "Press Release " In this regard, to continue to increase its competitiveness with its comparable peers, the Company is reiterating and clarifying its commitment to expand operating margins by an incremental $500 million, all else being equal, by the end of 2015 through operational improvements and additional cost reductions. The preliminary 2014 cost guidance provided by the Company on its third quarter 2013 conference call reflects this commitment.

In conjunction with the previously disclosed $300 million in cost savings associated with the shore-based initiative, this represents a total targeted operating margin improvement of approximately $800 million by the end of 2015. As previously disclosed, the Company expects to realize approximately $200 million in cost savings related to the shore-based initiative by the end of 2014. Additionally, as a key element of its balanced capital allocation strategy, Transocean will continue to renew its fleet by investing in high-return, premium drilling rigs, both floaters and jackups.

If you factor in half the savings company suggests the upside opportunity to the operating model is exponential. By 2016, Company can be generating $4.6B in EBITDA and $6.30 eps. If you give company the full benefit of cost savings the upside can be to $4.9b in EBITDA and $6.80 eps.

If you use 8x EV to EBITDA Multiple (today 8.4x) you get a $82.76 stock, disc back 3 years at 7% implies an NPV $67.56 or 44% return. Multiple expansion is possible with dividend yield and growth accelerations.

Bluesky opportunity remains in Mexico as the Government has plans to auction off licenses to E&P players.

Risk/Reward remains quite favorable for new longs.

Near - term risks are Ultra Deepwater Rigs are seeing day-rates of $450-500/day. Original guidance called for $500-550k. This will negatively impact Q4 EPS, 2 UDW Rigs remain idle thru mid 2014. Analyst models have been adjusting estimates lower.