Transocean Shares: 50% Upside Potential Plus A High Yield

| About: Transocean Ltd. (RIG)

The big drop in oil prices has led to even steeper declines for many stocks in the oil sector. Transocean (NYSE:RIG) shares could now be providing investors a chance to buy a dip in what appears to be a long-term uptrend. Here are 4 reasons why investors should consider Transocean shares (particularly on pullbacks) as the stock could be poised for more gains in 2012 and beyond:

1. UBS (NYSE:UBS) recently put a $70 price target and gave a buy rating for Transocean shares. The price target had been $62, so clearly UBS likes the progress this company is making after the tough year it had in 2011. With the current share price of about $46, investors would see gains of about 50%, if the shares hit the $70 price target set by UBS.

2. Transocean shares appear to offer value based on a number of metrics. The stock trades for just a small premium to book value which is $44.90 per share. It also trades for less than 10 times earnings estimates for 2013. The average stock in the S&P 500 Index trades for about 2.2 times book value and Transocean only trades for about 1.1 times book value. Furthermore, the average price to earnings ratio for the S&P 500 Index is currently about 16 times earnings, and around 13 times earnings for 2013. That puts Transocean shares at about a 30% discount, to the average S&P 500 stock.

3. Transocean recently reported first quarter results for 2012, which saw strong revenue growth of 9%. Profits were impacted by about $184 million in special one-time charges and that brought net income down to $42 million or 12 cents per share. However, without those charges, the quarterly profit would have been about 80 cents per share, which was well above analyst estimates of 34 cents per share.

4. The long-term future looks bright for offshore drilling. The Gulf of Mexico is seeing a sharp rebound in drilling activity, and Brazil has huge potential for offshore drilling in the coming years. China and other emerging market countries are likely to see large numbers of their population rise into the middle-class which will create more demand for energy. This is a secular trend that will continue regardless of the debt crisis in Europe, and Transocean is one way to participate in this growth. With the global markets starting to show signs of weakness, it makes sense to buy in stages since all risk assets could drop further in the short-term. While investors wait for a rebound in the stock, it pays out a dividend yield of about 6.6%. The payout ratio is close to 100% based on depressed 2012 earnings estimates, but that ratio drops to a much more reasonable level around 60%, based on 2013 earnings estimates.

Key Data Points For Transocean From Yahoo Finance:

  • Current Share Price: $46.63
  • 52-Week Range: $38.21 to $70.77
  • Dividend: $3.16 per share annually which yields 6.6%
  • 2012 Earnings Estimate: $2.96 per share
  • 2013 Earnings Estimate: $5.09 per share
  • P/E Ratio: about 15 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIG over the next 72 hours.