Transocean LTD (RIG) is an international provider of offshore contract drilling services for oil and gas wells. Its fleet of 128 vessels includes drill sips, semisubmersibles, and jackups, which operate in technically demanding environments. RIG operates in two segments: contract drilling services and drilling management services. With RIG's deepwater expertise, it is one of the best-positioned drillers to capitalize on numerous offshore drilling technology breakthroughs, as well as higher oil and gas prices. In addition, RIG has hinted at spinning off its commodity jackups into a separate company possibly in the second half of 2013, which could improve the overall quality of Transocean's fleet, as reported by Jane Lacave from AVAFIN. With the improved fleet quality and substantially increased demand in the deepwater market due to large discoveries, RIG has positioned itself strongly to gain from this trend. While the outlook for RIG looks promising, we will now dig into RIG's fundamentals and analyze its short-term technical trend in the following article.
Fundamental Overview
Since the Deepwater Horizon explosion and massive oil spill starting in April, 2010, RIG had almost fully recovered its share price in early 2011. However, its share price had since then declined, almost back down to its lowest level in 2010. Below, we had compiled a list of numbers for us to quickly evaluate the impact of the Deepwater Horizon explosion.
5 Year Compiled Data for RIG | ||||||
Fiscal year ends in December. USD in millions. | Dec-07 | Dec-08 | Dec-09 | Dec-10 | Dec-11 | TTM |
Revenue | 6377 | 12674 | 11556 | 9576 | 9142 | 9576 |
Other operating expenses | -601 | 272 | 335 | 755 | 5262 | 15748 |
Investment/asset impairment charges | 334 | 1012 | 5229 | 5443 | ||
Free cash flow | 1693 | 2751 | 2546 | 2535 | 765 | 1071 |
Source: MorningStar
While revenue was recovering, the other operating expenses and investment/asset impairing charges were still causing negative EPS for RIG in 2011 and for the trailing twelve months period. However, we believe the worst free cash flow period was over in 2011 and it should continue to improve even more from 2013 and on. From a valuation perspective, RIG's P/B of 1.1 and Price/Sales of 1.7 are all below the industry average of 1.4 and 2.2. By considering RIG's growth potential and improving fundamentals, we believe RIG is currently under-valued. However, until the damage from the Deepwater Horizon explosion is addressed, RIG might stay under-valued for a while.
Short-Term Technical Trend
On Thursday's trading, RIG closed at $48.35 with a 2.22% gain. The trading volume of 5.44M is 26.8% more than the 30 day average volume of 4.29M. From the technical perspective, as seen from the chart below, RIG had closed above its 50-day MV of $47.14 at $47.30 yesterday. Today, by closing at $48.35, RIG had broken through its 200-day MV of $47.48. Moreover, the MACD (12, 26, 9) indicator had been showing a bullish sign since Oct. 11, 2012 and the MACD difference continued to diverge. The buying strength for RIG is also increasing with RSI (14) closed at 60.39 on Thursday.
(click to enlarge)
Source: StockCharts.com
Option Play Reviewed
While we are still concerned about the damages of Deepwater Horizon event, we believe RIG has sufficient sources to recover and expand. RIG's share price should recover sooner or later with the increased demand for its services. In the short-term, we will review a bullish, credit put spread for RIG to take advantage of this technical bullish trend for traders who are long on RIG.
Short 1x Jan, 2013 Put at the strike price of $45 for the credit of $1.89
Buy 1x Jan, 2013 Put at the strike price of $40 for the cost of $0.79
The maximum profit potential is $1.1 and the maximum risk/margin requirement is $3.9. The profit/risk ratio is 28.2% for a 3 month investing period. If RIG closes below $45 upon option expiration, the acquisition cost is $43.9 per share, which gives us an edge of 9.2% over the current price of $48.35.
Note: All the prices are based on Oct. 18's closing and all calculations are before fees and expenses.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIG over the next 72 hours.
