Transocean: High Yield, Rising Positives

Sep. 6.13 | About: Transocean Ltd. (RIG)

It has been awhile since I covered one of the more unusual yield plays within my income portfolio, offshore driller Transocean (NYSE:RIG). However, the company has garnered some positive catalysts of late, pays a 5% yield and is cheap on a valuation basis.

Recent Positives:

  • Credit Suisse upgraded the shares on Thursday. The investment bank went to "Outperform" from "Neutral" citing Carl Icahn's ~6% ownership stake and possible dividend increases, buybacks or a move to a MLP structure as positives. It has a $60 price target on the stock. This move comes after several downgrades from other analyst firms that hurt the shares.
  • Speaking of Mr. Icahn, it was divulged that the noted activist and one-time "corporate raider" has upped his stake in this oil services firm to a significant 6% stake in mid-August.
  • In early August the company announced it has added $2B to its enormous backlog that now stands at $28B by extending a couple of offshore drilling contracts.
  • Oil prices are strong with WTI approaching $110/barrel.
  • Finally, Mexico is pushing through energy reforms that BAML believes will result in an annual increase of $2.5B in spending on oil services, most of which will move to major players like Transocean.

Valuation:

RIG is cheap at just over 8x next year's projected earnings and less than 10% above book value. Revenue growth is expected to accelerate to over 10% in 2014 from gains of around 4% this fiscal year. The stock has a minuscule five-year projected PEG (.5) and is selling for approximately 7.5x operating cash flow.

Even with the recent downgrades, the median price target of the 32 analysts on RIG is $55 a share, some 20% above its current price. On top of the five percent dividend yield, this is an attractive capital appreciation play. I would look for Mr. Icahn to ratchet up pressure for increasing the company dividend payout and/or other shareholder friendly moves.

Finally, the stock is right above solid technical support levels (see chart).

(click to enlarge)Click to enlarge

Disclosure: I am long RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.