Transocean (RIG) has had a cloud over its stock since a small spill (approximately 3600 barrels) off the Brazilian coast. However, I think this event will run its course in good time with a major impact as it was an extremely minor spill and it is in Brazil's best interest not to freeze foreign investment and the technology it needs to unlock its vast ultra-deep water oil reserves. Petrobras (PBR) has already filed a legal action to lift the injunction. (This is Brazil after all) Meanwhile, other positives are mounting for this oil services firm and its cheap shares have room to run.
Positives for Transocean:
- UBS came out and said the recent injunction in Brazil should only have a negative impact of 5 cents a share in the coming quarter. It reiterated its $70 a share price target.
- The company just received a massive $7.6B contract from Royal Dutch Shell to build four huge rigs over the next decade.
- Goldman Sachs came out this week and raised its price target to $54 from $52, and stated it expects Transocean to beat third quarter estimates when it reports.
5 additional reasons to pick up Transocean at $45 a share:
- The median price target on the stock is $60 a share by the 32 analysts that cover the stock. RIG is also selling at the bottom of its five year valuation range based on P/B and P/S.
- The company has crushed earnings estimates the last three quarters. The average beat over consensus during that time frame has averaged over 45%.
- RIG is cheap at just 4% over book value, and has a five year projected PEG of under 1 (.67).
- Given Transocean's growing backlog, less than 10 times forward earnings and around 8 times operating cash flow is a bargain.
- The stock has some medium term technical support around $42. See chart below.