Transocean and Its Peers Seeing Pent-Up Demand - BoA

Banc of America is out with a good call saying they see incremental demand for deepwater rigs from exploration success driving additional backlog and ultimately multiple expansion from the higher visibility. Among the names, the firm reits Buy on Transocean (NYSE:RIG) with a $175 target.

Stronger-for-longer. Yes it's a sell-side cliche, but with the industry's inability to keep up with growth in crude oil demand (the tyranny of geology and politics), the lack of deepwater rigs (73% of floater days are already committed over the next 36 months), and upside from a forecasted increase in exploration activity (BAC estimates Tupi alone needs an incremental 25-50 deepwater rig years), they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future. While the lack of rig availability may limit 2008 EPS upside, the increase in pent-up demand, most visibly in the deepwater rig market, implicitly provides backlog for service companies as well, and should make for a multiple expansion the story for 2008.

While forward cash flow and earnings multiples have compressed for the better part of the last four years, multiples appear to have bottomed. With the pent-up demand offering unprecedented visibility, they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future, and drive multiple expansion in 2008. Interestingly, multiples for the group also expanded as the cycle matured back in the 1970s cycle.

Notablecalls: BAC's comments make sense. Companies with deepwater exposure may represent a safe haven for now and we will see multiple expansion there. The chart on RIG looks good, and I think BAC's call will generate some buy interest in the name.

Other Buy-rated names mentioned in the call: DO, CAM, FTI, SLB

I'm also hearing GSCO is upgrading several Oil Service names which should generate further interest in the space today.

Comments

[MistaWhite]

I like DRYS with the recent 30% purchase of Ocean Rig. They are a deep water driller and this should be a good way to ear some extra money going into 2008/2009. Holding on tight and bought during its recent 16% pull back.

[Thinkingahead]

Gee. B of A was way ahead of the field on this call.

[NormanLepoff, M.D.]

I think this article makes sense, but these analysts always seem to recommend to buy at the top and sell at the bottom. Look at the financials as an example. No analysts can be trusted.

[Jake2]

Article ok but thin on nuts and bolts numbers, especially for secondary calls.

[soma6]

Never buy on recommendations, that's smart money selling to stupid money. Always wait for a pull back.

And yes, deep water ocean drillers are a good buying investment opportunity for 2008 especially a company with Harsh Environment deep water rigs. The short supply is commanding higher premiums for charter. @upwards of $275M to build new HEDW platforms Dryships CEO George Economou scored BIG time with his 30% ($400m)stake in Ocean Rig. HEDW rigs will command up $500k per day for charter in the next year. Yesterdays pull back (-2.87%) of RIG may present a entry point. In the mean time DRYS is a screaming buy at 77.40 with a PE of around 8 and a target of $120.

Cheers