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One of my top picks in the oil & gas sector is Noble (NE), which has compelling momentum and fundamentals. The company is rated near a "strong buy" on the Street versus a "buy" for Transocean (RIG). I find significant upside for the company and attractive ratio improvements.

From a multiples perspective, Noble is attractive. It trades at 9.1x forward earnings versus a respective 9.6x and 16.7x forward earnings for ENSCO (ESV) and Transocean. With that said, Transocean is also looking attractive with its leading dividend yield of 6.3% and free cash flow yield of 5.6%.

At the BAML 2011 Global Energy Conference, Transocean's CEO, Steven Newman, asserted thecompany's indemnity over the BP plc (BP) oil spill.

A few comments on Macondo - we issued our report on June 22 after a year's worth of deep investigation into the incident that ultimately concluded that a series of decisions by the operator associated with design, construction and abandonment of the well compromised the well's integrity. We continue to maintain our position with respect to the indemnity. We have a clear indemnity in the contract, and it's important to put that indemnity in context. That indemnity is a part of the contractual agreement between Transocean and BP. It reflects the bargain that the companies arrived at with respect to the risks and rewards. It underpins how we price our services and it reflects what risk we re-price in the marketplace, and many of those points we've made in our filing for partial summary judgment, which we submitted to the court on November 1.

If BP fails to honor its promises, it doesn't live up to its obligations, if the service community can no longer rely on the contract, it will have an overnight impact on offshore E&P. The cost structure will increase dramatically and only the largest companies will participate if we cannot quantify the risks, and I don't think anybody wants that to happen.

The company is in excellent financial shape and has stellar geographical diversification to hedge against instability in any one particular region. Transocean's dominance in the deep water market also allows for attractive margins while its excellence in deep water drilling innovation assures the sustainability of the corresponding streams of free cash flow. The company has a solid backlog and has gained drilling permits for the Gulf of Mexico. On the other side of the equation, however, the company has a weak jack-up market.

Consensus estimates for Transocean's EPS forecast that it will decline by 74.9% to $1.49 in 2011, and then grow by 98% and 58.6% in the following two years. Of the 12 revisions to estimates, 9 have gone down for a net change of -0.9%. The tremendous uncertainty over earnings will help drive strong high-risk adjusted returns should the economy improve.

Noble has had overall impressive fourth-quarter results, despite guidance for costs being disappointing. The drilling environment is structurally strong and management is optimistic about trends in the North Sea markets. ROE is estimated to expand by 670 basis points to 11.8% in 2013, as free cash flow yield turns positive. The company's efficiency, cost reductions, and strong execution will providing the driving force behind out performance.

Consensus estimates for Noble's EPS forecast that it will soar by 137.4% to $3.11 in 2012 and then by 35.7% and 23.2% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $4.17, the rough intrinsic value of the stock is $66.72, implying a staggering upside of 71.3%.

Source: 'Strong Buy' Noble May Soar, Outperforming Transocean

Additional disclosure: We seek business relationships with all of the firms in our IR coverage, but research covered in this note is independent and prospectively commissioned. The distributor of this research report is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence. Always discuss investments with a licensed professional before making any financial decision. Statements made within this report may include “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.