Transocean Investors Looking at 65% Upside

By: SumZero Staff | Published: September 11, 2012 | Be the First to Comment


Featured Stock Transocean (NYSE: RIG) -- $50.50

(The following information comes directly from SumZero’s community of buyside analysts.)

SumZero Analysts Following Transocean: 37
SumZero Investment Reports on Transocean: 5

SumZero Community Sentiment:
100% Long, 0% Hold, 0% Short

SumZero Consensus Price Target:
Mean: $83.11 per share
Median: $80.00 per share

Quick Thesis:
“An assortment of negative events (operational missteps, equity raises, etc.) has rightly punished Transocean, which was once the premier and largest offshore driller (in terms of market cap). However, the combination of these very public missteps as well as operational improvements by the company’s competitors has created a current risk/reward situation in the price of the stock that is skewed to the upside. While there are hurdles along the way in achieving a higher valuation, I think the downside risk from these levels is relatively low. ”

SumZero's Differentiated Market Insight:
“The fundamental outlook for drillers is robust especially in the deepwater frontier where Transocean has a large market share; but sadly, Transocean is an out-of-favor stock in a favored industry. The company has seen its stock price slump more than 40% this year – one of the worst performing energy companies in 2011. I think Transocean is significantly undervalued and offers compelling long-term upside even when employing conservative assumptions.”

“One should consider the company’s main competitors, namely Diamond Offshore (NYSE: DO), Ensco plc ADR (NYSE: ESV), Noble Corp (NYSE: NE) and SeaDrill Ltd (NYSE: SDRL). None of Transocean’s competitors have larger operational fleets than the 145 units the company has. Indeed Ensco has significant cost-cutting opportunities available following completion of its acquisition of Pride International at the end of May, 2011, but with only 71 units, the company is still relatively small in size. Noble took advantage of an uncertain rig market in late-2011 to acquire Frontier Drilling that helped it expand its deepwater fleet to 65 units. Meanwhile, Sea Drill is the smallest with 48 units. All that said, Diamond and Transocean are the only two companies with positive FCF.”

“Transocean’s free cash flow backlog projections still look very strong. FCF backlogs in 2011, 2012, and 2012 are $1.9 billion, $3.1 billion and $2.6 billion, respectively; while scheduled debt maturities are $1.9 billion, $1.8 billion, and $0.9 billion for the same period of time. Assuming Transocean utilizes the backlog and maintains (or improves) its revenue efficiencies, the company should be able to generate $2.9 billion in cash flow in 2012 and further increases to $3.4 billion in 2013. Based on an EV/2013 EBITDA multiple of 7.5x, versus an estimated 7.6x at the end of the very unfortunate 2011, I arrive at a 12-month price target of $73.63 per share. ”

“Oil is still the world's primary energy source and will be for decades to come. Demand for oil has pushed exploration into new frontiers, such as deepwater, around the world. Despite recent incidents, offshore drilling will continue to grow as the need for oil continues. Transocean has 18 of the world's 56 deepwater rigs and 27 of the 98 ultra-deepwater rigs or about 29% market share of the combined world's deep and ultra-deep fleet.”

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