Transocean (RIG) has shown an impressive performance by posting earnings per share of $1.29, which beat the Street's estimate by 77 percent. The improvement in the company's fleet utilization, the significant tax reduction that it managed to achieve, cutting down of expenses, and strong position in Ultra Deepwater were the reasons behind the earnings beat. RIG is attractive to investors due to its low valuations. It is trading at an EV/EBITDA of 8x, at discount when compared to the industry average of 10x. Its low five year expected PEG ratio of 0.73 reflects that investors can buy growth cheaply. According to 39 analysts' estimates, its earnings will increase by up to 59 percent by the end of fiscal year 2013. The company increased its capital expenditure estimate to $3 billion for 2013. It also aims to continue achieving high revenue efficiency in the coming period. Thus, we reiterate our bullish stance on the stock.
Transocean, the world's largest offshore oil and gas drilling company, will benefit from the expected increase in energy needs in the coming period. In our opinion, the company will obtain more drilling contracts in the future due to high oil consumption growth (0.9 million bbl/day in the fiscal year 2013, according to EIA estimates). Moreover, we believe that gas rig counts would also increase in the coming period due to a structural shift from oil to gas, which would increase natural gas demand in the country.
The company registered revenues of $2.4 billion in the third quarter, as compared to $2.3 billion in the second quarter of 2012. Its revenue increased primarily because of rising revenue efficiency in its Ultra-Deep water floaters. Revenue from drilling contracts has also increased considerably, by $136 million, through superior offshore drilling activities. Its ability to capitalize on current projects is reflected in its high revenue efficiency of 94.3% in the third quarter, as compared to 89.5% in the third quarter of last year.
Transocean is constantly trying to increase the operational efficiency of its business and to increase its margins. Its maintenance and operating expense has decreased considerably, by $43 million in the third quarter of 2012. However, in its contract drilling business segment, expenses have increased by $17 million due to the rise in drilling activity and annual pay. However, we believe the commencement of its shipyard projects would enable the company to offset this impact by generating higher profit margins.
There are potential risks involved with our analysis, which are as following:
- Expected regulation of offshore oil and gas drilling as a consequence of the Macondo event.
- Rapid structural shift towards renewable energy sources e.g. solar companies trying to come up with environment friendly energy cars.
- Impact of hurricanes on its business operations.
Stock Price Movement
RIG showed an upside of 26.7 percent over the course of the last six months. Its 50-days and 200-days moving averages are $33.6 and $33.5, respectively. We believe the stock is trading at low multiples and has significant potential to show an upside due to increasing offshore drilling activities.
Source: Google Finance
RIG is trading at a low EV/EBITDA valuation of 8.14x at a discount when compared to EV/EBITDAs of 9.2x, 11.5x, and 10.8x of its competitors; Ensco plc (ESV), Noble Corp. (NE) and Rowan (RDC), respectively. The stock is trading at a price to sales of 1.83x, EV/Revenue of 2.66x and forward price to earnings of 10.64x, which are relatively lower than those of its direct competitors. Moreover, anagement has forecasted that RIG would sustain its high revenue generation capacity in the next year. They estimate that RIG's revenue efficiency would be around 93 percent in the next quarter and would continue to increase with increasing drilling activities in the coming years. RIG is creating a strong bond with its customers by improving the quality of its services. Therefore, in our opinion, there is potential in the stock to show a significant upside going forward.
PEG (5 yr expected)
Source: Yahoo Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.