Transocean (NYSE:RIG) shares have been under pressure for most of 2011, and many investors have tried to catch the bottom, only to see the stock drift even lower. Transocean shares just managed to hit a new 52 week low in the last few days of 2011. Now is a good time to consider some events and factors that could push the stock even lower, as well as what signs to look for that could indicate that Transocean shares finally have bottomed and are finally safe to buy.
Transocean has faced multiple challenges which include, legal expenses and potential liability due to the BP spill in the Gulf of Mexico, idle time and maintenance expense on a number of rigs, potential expenses due to another spill in Brazil, as well as other issue. These challenges might be around for awhile, but the stock could bottom out before they are resolved. Here are three factors to consider and it could make sense to perhaps wait for at least one or all three of these factors to play out before considering a buy in Transocean shares:
1) A dividend cut for Transocean appears likely and it could come around February or possibly sooner. Depending on the size of the cut, the stock could trade down significantly.
2) Oil has been bid up by speculators due to concerns that Iran might block the oil supplies that are transported through the Strait of Hormuz. The Iranian government has credibility issues, and even if they did act on this threat, an Iranian blockade would probably be immediately and successfully unblocked by U.S. military forces. When investors realize that this is not a real plausible reason for higher prices, oil will probably settle back down around the $85 to $90 range and that could cause oil related stocks like Transocean to drop from current levels.
3) Many investors expect S&P or other ratings agencies to downgrade the debt rating of certain European countries. A downgrade could come at any time and it could cause significant pressure on the stock markets globally. A bigger issue than any downgrade is whether or not the European debt crisis spirals out of control and causes a depression in Europe or globally.
Most of these events are quite likely and if one or more of these takes place, Transocean will probably drop further. A significant drop in RIG shares coupled with high volume could be the final washout investors need to see before the stock can put in a real capitulation bottom. It makes sense to compare valuations in the sector to get a better idea of when to buy RIG shares. Here is a closer look at some of the leading offshore drilling companies:
Transocean (RIG) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of about 138 mobile offshore rigs that it either owns or operates. It looks like RIG shares could trade between $30 to $35 per share before finding a real bottom. Transocean continues to make lower lows and lower highs, and this indicates the stock remains in a downtrend. Many investors have failed to recognize that Transocean has more debt/leverage and an older fleet in comparison to some companies in this sector. Transocean shares are trading for about 13 times 2012 earnings, which makes the stock look expensive compared to others here, and the dividend does not look safe. RIG might find a firm floor around $30 to $35 based on the price to earnings metrics that other stocks in the industry have. A few companies listed here trade for about 8 times 2012 earnings and if RIG shares traded at that level, it would put the share price below even $30 a share.
Here are some key points for RIG:
Current share price: $38.63
The 52 week range is $38.21 to $85.98
Earnings estimates for 2011: $1.58 per share
Earnings estimates for 2012: $3.19 per share
Annual dividend: $3.16 per share which yields 7.9%
Ensco PLC (NYSE:ESV) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of 42 jackup rigs, 4 ultra-deepwater semi-submersible rigs, and a barge rig. Ensco might be the best in breed stock for the industry. Cramer has called this stock a buy. The book value is $46.46 and Ensco is not facing nearly as many challenges as other companies, so this might be one of the safest plays. Ensco trades for about 8 times 2012 earning and the dividend looks safe.
Here are some key points for ESV:
Current share price: $47.82
The 52 week range is $37.39 to $60.31
Earnings estimates for 2011: $3.13 per share
Earnings estimates for 2012: $5.96 per share
Annual dividend: $1.40 per share which yields 2.9%
Diamond Offshore (NYSE:DO) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of about 47 offshore rigs. Diamond may also need to spend money on rig maintenance in 2012 due to having an older fleet. This stock is trading at about 11 times 2012 earnings. Any dips to $50 or below looks like a solid buying opportunity, and the dividend looks very safe.
Here are some key points for DO:
Current share price: $55.53
The 52 week range is $51.16 to $81.19
Earnings estimates for 2011: $6.51 per share
Earnings estimates for 2012: $4.80 per share
Annual dividend: 50 cents per share which yields .9%
Noble Corporation (NYSE:NE) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet comprised with about 14 semi-submersibles, 12 drillships, 45 jackups, and 2 submersibles. Noble is well-managed and the company has a strong balance sheet. This stock is trading close to book value of $29.03 and for only about 7.5 times 2012 earnings. The dividend looks very safe as well.
Here are some key points for NE:
Current share price: $30.66
The 52 week range is $27.33 to $46.72
Earnings estimates for 2011: $1.43 per share
Earnings estimates for 2012: $3.93 per share
Annual dividend: 52 cents per share which yields 1.6%
Atwood Oceanics (NYSE:ATW) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of semi-submersible rigs, semi-submersible tender assist rigs, jack-up drilling rigs, and submersible drilling rigs. This stock has performed relatively well and the company has a superb balance sheet with little debt. The stock is trading for about 8 times 2012 earnings.
Here are some key points for ATW:
Current share price: $39.05
The 52 week range is $30.64 to $48.84
Earnings estimates for 2011: $3.94 per share
Earnings estimates for 2012: $4.90 per share
Annual dividend: None
Vantage Drilling Company (NYSEMKT:VTG) offers offshore contract drilling services to oil and natural gas companies. The Vantage fleet includes four ultra-premium jackup rigs, three ultra-deepwater drillships, and two deepwater semi-submersibles. Vantage has a newer fleet and a solid management team. However, this company does have a fairly heavy debt load and that could limit the upside in this market. This stock looks like a good buy overall at current levels. There is a solid chance that a larger company would buy Vantage in order to gain access to the relatively new fleet that Vantage has built.
Here are some key points for VTG:
Current share price: $1.12
The 52 week range is 97 cents to $2.26
Earnings estimates for 2011: a loss of 17 cents per share
Earnings estimates for 2012: a loss of 2 cents per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long VTG.