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First quarter earnings reports have been a mixed bag. While most companies have beaten on the bottom line (~70% of reports so far), most have not beat the consensus on the top line. However, offshore drilling/services companies seem to be having a good quarter. Almost all the firms in the industry are beating on the top and the bottom lines. Oil States International (NYSE:OIS) is up more than 20% over the last few weeks on the back of a solid quarter and the disclosure of a 9% stake by activist Jana Partners. Hornbeck Offshore (NYSE:HOS) and Ensco (NYSE:ESV) also delivered strong results last week with reports that beat on the top and bottom lines. It seems that higher day rates and strong demand seem to be buoying prospects for the sector overall.

One of the rare companies in the industry that has not posted quarterly earnings yet is Transocean (NYSE:RIG). I expect the firm to post solid results when it reports on Wednesday and believe the cheap shares still have upside.

7 reasons Transocean will head higher from $53 a share:

  1. The company has proposed a $2.24/share annual dividend. Although less than the $4/share annual dividend advocated by Carl Icahn, the payouts will give the stock a better than 4% yield. It also announced that it will pay back $1B more in debt than previous guidance by the end of 2014.
  2. The impacts from a minor spill off Brazil in conjunction with Chevron (NYSE:CVX) is mostly behind the company and the rest of the fallout from the Gulf Oil Spill of 2010 should be over by the end of the year. This will remove a couple of headwinds for the stock.
  3. In addition to a generous yield, RIG is cheap at just over 9x 2014's projected earnings and just 22% over book value.
  4. Analysts expect between 7% to 10% revenue growth over the next two fiscal years and the stock trades for a minuscule five year projected PEG (.41).
  5. In its April fleet status report, the company announced new contracts totaling more than $1B since its last update in March. It also stated the newbuild Deepwater Asgard was awarded a three-year contract with a major international oil company for work offshore Indonesia at a dayrate of $600K.
  6. The company is making the right moves to increase shareholder value (Ex, dividend increase/debt pay downs). I expect this to continue, but having Icahn there to ensure they do is reassuring.
  7. Finally, and probably most importantly. Analysts consistently underestimate Transocean's earnings power. The company has easily beaten earnings expectations for five straight quarters. The average beat over consensus over that time span has averaged ~35%.
Source: Transocean: Get In Before Earnings