A Look at Earnings from Transocean and Devon

I don't own these 2 names directly but do own peers, and these are bellweathers for their sectors so I thought I'd post them. One thing to note  - despite great numbers, the stocks are not reacting. Hence, we could be prone for a pullback shortly in these names. When stocks do not react to great news, that is a potential change in character, just like when stocks shake off bad news and go up. The charts in "commodities" despite some pullback, are still quite overextended and yesterday's call of Goldman $150-$200 oil [Goldman Sachs: Gasoline Not Driving Oil Price - Oil Going to $150-$200] would be the perfect catalyst to mark a near term top...

Despite my Kool Aid infusion I am still quite bearish, and I view this period akin to Sep/Oct 2007 when we partook in the foolishness to make money but realized there were more shoes to drop. I am sort of laughing at how the market goes up on $110, $115, $120, $125? oil ... as if it won't have any effect on profits or people across the globe. It is essentially a world tax on all productivity and profit. But oh well, it won't matter until it matters. If we cannot break through this 200 day moving average I would not be surprised to see a meaningful move downward - we have ignored the facts for about 6 weeks now since the "Fed put" was brought underneath the market via Bear Stearns. At some point ignorance must turn back to reality...

On to the earnings reports.

Deep sea oil driller Transocean (RIG) reports a doubling of profits

• Transocean Inc (RIG), the world's largest oil and gas drilling contractor, said on Wednesday quarterly profit more than doubled, beating Wall Street expectations, on higher rates for its deepwater rigs and lower-than-expected expenses.
• Record high crude oil prices have created a boom in demand for floating rigs and drill ships that operate in the deepest waters. Drilling contractors have benefited as tight supplies have pushed daily rig rates above $600,000 in some cases.
• First-quarter profit jumped to $1.19 billion, or $3.71 per share, from $553 million, or $2.62 per share, a year earlier. Excluding one-time items, the company earned $3.80 a share. Analysts, on average, had expected $3.32, according to Reuters Estimates.
• "The beat was mainly due to lower operating expenses," Mark Urness, oilfield service analyst at Calyon Securities, said. "It's probably deferred maintenance, so it will come back later in the year. Still it's still a good quarter."
• Average daily rental rates, or dayrates, for the Houston company's total fleet rose 15.6 percent to $229,000. The increase in average dayrate was seen in all categories, primarily due to rigs starting new contracts at the higher dayrates, Transocean said.
• Costs for the first quarter of 2008 benefited from the postponement of several shipyard and major maintenance projects to later in the year, according to the company.

Devon Energy (DVN) beats by $0.41

• Devon Energy Corp., the largest U.S.-based independent oil and natural gas exploration and production company, said Wednesday its first-quarter profit rose 15 percent as higher prices and production offset one-time charges and increased expenses.
• Excluding one-time charges -- including a $780 million loss on derivatives instruments due to rising natural gas prices -- the company posted earnings per share of $2.74.
• Analysts polled by Thomson Financial expected, on average, earnings per share of $2.33.
• Production rose 9 percent over the year-earlier quarter to 640,000 barrels of oil equivalent per day. The company's average price of natural gas rose to $8.03 per thousand cubic feet, from $6.77 per thousand cubic feet, and the average price of crude oil rose to $97.67 per 42-gallon barrel, from $58.33 per barrel.
• Combined, the company's average oil, gas and natural-gas liquids production from continuing operations was 640,000 oil-equivalent barrels a day, up 9%. The production growth was concentrated in onshore fields within the United States and Canada.
• Devon's net production from the Barnett Shale field in northern Texas averaged a record 995 million cubic feet of gas equivalent a day in the first quarter, up 36%. We can grow that for a long time to come. That's what's exciting," Devon CEO Larry Nichols said in a CNBC interview.

The main thing we want to see for exploration companies is a good replacement rate - that is, they can replace old production by either new finds or expanding current locations, and push production at a higher rate going forward. The inability to do this is a problem some of the larger players, i.e. Exxon (XOM) are now facing. And potentially an issue with some of the world's large state owned producers are facing (which would lend credence to the high energy prices being a permanent fixture in society)

Disclosure: No positions

Comments

[JREwing]

Since all significant discoveries are made in deepwater or ultra-deepwater, i just can't get bearish on this RIG.

Sure they have cost increases, but they get great day rates across the board. Even in the jack up market. They have the biggest and most sophisticated deepwater fleet and they seem to execute well. I like the fact that they are not USGOM and Brazil centric. Also, they sold their shallow water USGOM business, because it has the weakest margin. Their business in India looks nice. Seem to be a lot of opportunities there.

I own RIG.

[MichaelFilloon(legmaker)]

Great job, and I have seen these stocks not reacting, but think it is more of a runup on earnings prior to, that has caused them to stall. I still think they will be heading up over the short term and are just taking a breath as the market was ahead of their earnings and already had them priced in. I own RIG, but also bullish gas E&P through CHK

[JREwing]

Exactly, even yesterday with the downgrade, RIG was the money flow leader in buying on weakness.

[StevenHurwitz]

Whatever you consider the prospects for RIG you can't overlook the sound reasoning of Trader Mark that high oil prices are"essentially a world tax on all productivity and profit." Reality will eventually intrude on economic denial, but the big question is when. Sitting on the sidelines never made anyone money. The folks who make money do, however, get out "too soon."

[Thinkingahead]

RIG is a name to put in the drawer and take out once a year for a peek. The drillers have unmatched visibility, and RIG is not only the biggest but one of the cheapest. Most importantly, deepwater drilling is dependant on not only rigs, but qualified people. In this sense RIG has a very nice moat around it. On the call, the CEO admitted RIG would lose market share, but only because it is practically 100% booked for the next several years. Nice business at a 10.5X PE.

One comment on DVN. Why exclude the "one time charge" on gas hedges? That is nonsense. Those hedges are integral to the business as much as the cost of drill pipe. Put the $780 million loss back in the Q1 results - those dollars count too.

[resourceman]

Agree wih "thinking ahead ", these 2 stocks can be put in the drawer. I would not like to be out of these 2 stocks--sure, there will be bumps, but the trend is up !

[yank]

Thinking Ahead:
Nice post. At a 10.5 pe and a ridiculously low forward p/e of 0.5, RIG is incredibly cheap all things considered. And for those who say it ran up prior to earnings and it's all "baked in the cake", I say HOGWASH. Crude is up 30% year to date. RIG is up 15%. How can anyone say it's already reflected in share price. It's not!!! Analysts are still believing oil will drop back to $75. That's kind of like believing in the tooth fairy. RIG's fair value is closer to $180 by my estimate.

[BrianPursley]

RIG is the most undervalued stock in the world.

My belief is reinforced by the fact that all the analysts like Mike Urban at Deutsche Bank hate it.

"Deutsche Bank analyst Mike Urban also sounded a cautious note on the stock, keeping a "Sell" rating and a price target of $120 per share. That implies the stock price will fall 23.8 percent over the next year."

biz.yahoo.com/ap/08050...

Jefferies rumor yesterday that "Petrobras is likely to announce letters of intent (LOI) to award long-term contracts for as many as 17 new-build ultra-deepwater rigs."

online.barrons.com/art...

This is confirmed by Bloomberg.

"Brazil is preparing to tap the biggest crude-oil discovery in the Western Hemisphere in three decades, which lies just off its Atlantic coast. Petroleo Brasileiro SA, Brazil's state oil company, is in talks with Houston-based Transocean Inc. to extend offshore drilling contracts."

www.bloomberg.com/apps...

[JREwing]

Good post Brian.

I really tried to understand the 'Sell' rating from Mike Urban. He means the risk in the Jack up market is to big. Wow, that is breaking news.

RIG showed, that they don't hesitate to sell off non performing assets. Bob Long clearly stated in the conference call, that the cash flow produced by the Jack up fleet is to significant to sell it.

I am glad to be the company of so many RIG fans.

[Mmarrkk]

Thinking Ahead: the reason you exclude "losses" from hedges is that they are not really losses! They sold their production at $9/mcf but could have sold it for $10 had they not hedged. They did not "lose" a $1/mcf, they just lost the opportunity to make more. The whold financial accounting of hedges is ridiculous and that's why most everyone ignores losses due to hedges. Again, they didn't "lose" anything. On a cashflow basis they are printing money!

[thomas728]

I think I must be alone but spot oil is going to come off
in a big way.Give you a reason ? The fundamentals in
crude have not really changed.

Why not last year or '06 ? And what has changed ? Nothing
except for the lust not to let, what has become a historic
up-tick escape the locals......and companies who never hedged
are now doing so.

Sure, crude could vault to $200 or better while this new frontier
has to contend with itself on "what next".

The mere fact that pricing on great stocks like RIG et al are intractably tied to the commodity itself gives me pause to
think about the dog and it's tail.Always been this way ?
Uh Uh !!!!!!!

And what a technical picture on the very basics P:E, Income,
etc.

When crude does start back to real per barrel pricing the
exodus will be worse than a fire at the disco......

Anything concrete to offer the respected participants ?
Absolutely none...it just seems as if I've seen this movie before.

In any case I hope the longs prosper ...me ? I just have a
ticket to the show.

Out of RIG with a wonderful profit 6 weeks ago.

[JREwing]

Did you give any reason why crude oil is going to come down?

Like many people, when it comes to oil, you seem to be guided by wishful thinking.

May be there is something in the bible, about oil having to be for free.

Fact 1: Easy oil is gone. Supergiants like Cantarell or Ghawar are declining in daily production. Easy oil, because an idiot with a straw could suck oil out of those fields.

Fact 2: 30 Years of underinvestment in the oil industry. Fields, infrastructure, workforce are old. Exploration has been neglected.

Fact 3: Consumption per capita in India and China are only a fraction of the OECD countries. On top of that, petroleum products in the BRIC nations are subsidized, therefore no demand destruction.

Fact 4: All significant discoveries are made in deep or ultra deep water.

Fact 5: Every oil company in the world is hiking their E&P spending, even PEMEX drills in deepwater USGOM now.

Now, Thomas, why would oil demand come down?

Or let me put another way, when demand for oil comes down, I want to be short every stock there is, because then the world economy has got to be in a deep, deep toilet.

[Kezorm]

"One thing to note - despite great numbers, the stocks are not reacting. Hence, we could be prone for a pullback shortly in these names. When stocks do not react to great news, that is a potential change in character, just like when stocks shake off bad news and go up."

I believe that the news below helps to explain why RIG's share price did not surge upwards after the excellent earnings news. First I'll paste in the articles that carried the important news details:

**********************...
Jefferies rumor yesterday that "Petrobras is likely to announce letters of intent (LOI) to award long-term contracts for as many as 17 new-build ultra-deepwater rigs."

online.barrons.com/art...

This is confirmed by Bloomberg.

"Brazil is preparing to tap the biggest crude-oil discovery in the Western Hemisphere in three decades, which lies just off its Atlantic coast. Petroleo Brasileiro SA, Brazil's state oil company, is in talks with Houston-based Transocean Inc. to extend offshore drilling contracts."

bloomberg.com/apps/new......
**********************...

1.) RIG is apparently NOT getting these contracts for new builds.

2.) RIG IS getting contract extensions for rigs already operating there.

The Barron's article mentioned that smaller firms were getting contracts for the new builds which amounted to something around 2/3rds the dayrates that RIG gets for their state-of-art rigs.

This implies that Transocean is not getting any of the 17 contracts for new-builds. And this is probably why RIG's share price dropped a bit in the last couple days.

Does this mean that Transocean is necessarily going to miss the Brazilian sub-salt bonanza? No. Why not? Two main reasons.

It has been said that it will take 50 rig-years to fully develop the
5-8 billion barrel Tupi field. If "Sugarloaf" proves itself, and if
one scales the development effort upwards to accomodate the larger
field area, then it may require 400 rig-years of work to fully develop
Sugarloaf. (Just Sugarloaf... which is than 10% of the area with hydrocarbon potential.)

seekingalpha.com/artic...

So, 17 drilling rigs will not likely be able to satisfy the demand.

Furthermore, PBR is NOT the only company that will be needing, and contracting for drilling rigs to explore and develop the Brazilian sub-salt. HES, XOM, GALP and numerous others will also be making their own arrangements for drill ships to operate within other Brazilian claim blocks.

And Brazil is not the only country with fantastic sub-salt potential. West Africa has the same structures formed at the same time. The GOM, the abyssal GOM, the Scotian shelf and other places far too numerous to mention - ALL have potentially analogous salt formations in need of exploration. If 2008 generates more exciting news from Brazil, it will likely trigger a burst of interest in exploring analogous formations no matter where they are. Any country with off-shore petroleum potential that does not enjoy paying high prices to import crude... will likely, if they have not already, ante up and get in the game.

[JREwing]

Yep.

[SK]

Last night, Petrobras, announced its intent to contract 40 deepwater and ultra-deepwater drill ships and semi-submersible rigs. The company anticipates the construction and delivery of the rigs through 2017, and the priority will be given to building them in Brazil. We expect the new rigs to operate in the Santos basin.

Bottom line - this adds huge capacity for the ultra deepwater market. This area of investment is now verging on creating over capacity which will have a harsh impact on day rates for drilling rigs. It comes late in the construction cycle with several new builds in pipeline in the ultra deepwater segment. The jack up segment has also had similar huge capacity build. Going forwards, this will have an impact on utilization and day rates. On a 5 year basis I would stay clear of drillers; now is a good time to exit, there are better opportunities elsewhere.

[kwityercryin]

New rigs delivered through 2017? And how many will be ready 3 years from now? None. I shouldn't own a stock now because the price is going to drop in 5 or 6 years?

I'll keep a loose trailing stop loss on, but I've got a double now, I've taken some profits and I think I will let the rest ride, for the forseeable future anyway.