Transocean: Too Hot Too Fast, Let It Cool Down

Nov.26.13 | About: Transocean Ltd. (RIG)

The last time I wrote about Transocean Ltd. (NYSE:RIG) I bought a small batch in it stating that I thought "I can get a larger stake at a later date with a higher yield," meaning the stock price could come down. The stock indeed did drop 4.62%, and then shot up in mid-October. Since the last article it actually is up 9.61% excluding the dividend (it is up 10.82% including the dividend) versus the 9.5% gain the S&P 500 (NYSEARCA:SPY) posted. I initially sold ConocoPhillips (NYSE:COP) to put Transocean in the portfolio, so to be fair I have to compare it against Conoco and not only the S&P 500; during the same timeframe Conoco is up 10.59%. Transocean is an international provider of offshore contract drilling services for oil and gas wells. On November 6, 2013, the company reported third quarter earnings of $1.37 per share, which beat the consensus of analysts' estimates by $0.30. In the past year the company's stock is up 10.17%, excluding dividends (up 12.45% including dividends), and is losing to the S&P 500, which has gained 27.91% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying more shares of the company right now for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 11.14, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 9.05 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.64 per share and I'd consider the stock inexpensive until about $85. The 1-year PEG ratio (0.32), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 34.85%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 34.85%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 19.67%. Below is a comparison table of the fundamentals for the company from the time I wrote the last article to what it is right now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

20Aug13

46.53

10.16

8.19

5.68

85

0.27

37.51

25Nov13

51

11.14

9.05

5.64

85

0.32

34.85

Click to enlarge

Since I swapped out my investment in Conoco for Transocean it's only fair that I compare where the two stand against each other today as well on a fundamental basis.

Ticker

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

COP

72.81

10.83

11.48

6.34

95

1.29

8.35

RIG

51

11.14

9.05

5.64

85

0.32

34.85

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.39% with a payout ratio of 49% of trailing 12-month earnings while sporting return on assets, equity and investment values of 2.1%, 4.4% and 5.4%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.39% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company from the time of the last article to what it is right now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

20Aug13

4.81

48.9

2.1

4.4

5.4

25Nov13

4.39

49

2.1

4.4

5.4

Click to enlarge

Since I swapped out my investment in Conoco for Transocean it's only fair that I compare where the two stand against each other today as well on a financial basis.

Ticker

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

COP

3.79

41

6.9

16.8

10.7

RIG

4.39

49

2.1

4.4

5.4

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart (RSI) at the top, I see the stock falling out of overbought territory with a value of 50.91, indicating a bearish pattern. I will look at the moving average convergence-divergence (MACD) chart next. I see that the black line just crossed below the red line with the divergence bars decreasing in height, indicating another bearish pattern. As for the stock price itself ($51), I'm looking at $51.73 to act as resistance and $49.16 to act as support for a risk/reward ratio, which plays out to be -3.6% to 1.43%.

Recent News

  1. Deutsche Bank (NYSE:DB) came out indicating that all the moves to enhance shareholder value have already been priced in pretty much and the focus of the company will return to offshore drilling fundamentals which are deteriorating.
  2. At the company's analyst meeting earlier this month, it stated that there are near-term concerns for demand in deepwater drilling, telling analysts that 14 deepwater rigs are going to be available in 2014 out of a possible 39 rigs. The company still maintains a favorable long-term view on the prospects of its rigs though.

Conclusion

Transocean had a huge gain after coming to an agreement with Carl Icahn to increase the dividend, cut the number of board seats and give Icahn an additional board member, but has given back a bit of the gains since that time as it had a huge run up in a short amount of time. Keeping that in mind, I believe the stock is inexpensively valued based on future earnings and future growth potential. Financially the company is performing well but the dividend yield has come down a bit albeit at the expense of a higher share price which I will take any day of the week. On a technical basis I believe the stock is going to come down some more for now as it was extremely overbought from the time it was added to the S&P 500 to when it came to an agreement with Carl Icahn. What troubles me for now is that the stock has bearish technicals, has a third of its deepwater fleet unsigned for 2014, and I believe they are still shunned by the big-time investment banks for the well publicized issue which occurred in the past; it's for these reasons I will not be adding to my position now because I think I can get it at a lower price. For due diligence purposes, relative to Conoco I believe Transocean is doing better on a fundamental basis at this time while on the financial front I believe Conoco is doing better, but Transocean is not in a bad position.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long RIG, SPY. 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.