Why Transocean Is Worth $60

| About: Transocean Ltd. (RIG)


Transocean beat Q1 consensus estimates.

Global energy demand is increasing.

Management continues to provide long-term shareholder value.

Transocean (NYSE:RIG) headquartered in Zug, Switzerland, is a leading international provider of offshore contract drilling services for oil and gas wells. Transocean has a diverse asset base, which contains 78 offshore drilling units including the world's largest fleet of high-specification rigs comprised of ultra-deepwater, deepwater, and premium jackup rigs. RIG has a history of excellence including the first dynamically positioned drillship for exploration, the first rig to drill year-round in the rough Barents Sea, the first contractor to drill in the North Sea, the first offshore jackup rig, and Transocean has set the world record for drilling depth. Transocean has contracts with some of the largest energy companies in the world including Chevron (NYSE:CVX), Royal Dutch Shell (RDS-A), BP (NYSE:BP), Petrobras (NYSE:PBR), and Anadarko (NYSE:APC).

Transocean is currently trading at $41.60, which is down a little over 25% from its November high of $55.74. This decrease in share value is unwarranted and presents a great buying opportunity.

Transocean's Past Growth

Transocean posted Q1 EPS of $1.43, which beat analyst estimates of $1.03 by $0.40 and is up 54% from the same quarter last year. RIG has now beat EPS consensus estimates for four consecutive quarters. RIG also beat on revenue by $70 million posting $2.34 billion vs. estimates of $2.27 billion.

Future Growth Catalysts

RIG currently trades at a P/E of 9.8, which is well below the market average of 19.1. It is also lower than main competitors Diamond Offshore Drilling (NYSE:DO) with a P/E of 13.37 and Nabors Industries (NYSE:NBR) with a P/E of 82.44. This low P/E valuation demonstrates that RIG is undervalued and has room to run. There are two primary factors which provide Transocean with a competitive advantage. One: Transocean has the most technologically advanced drillships, which include their patented dual-activated drilling technology, therefore allowing the company to be more efficient in its drilling processes. Two: Transocean recently developed a new type of ultra-deepwater drillship, which is semi-submersible, therefore enabling the company to drill in depths never reached before (wells as deep as 40,000 feet and water as deep as 12,000 feet).

An essential factor that will drive future growth is the increase in global energy usage. It is projected that global energy usage will increase by over 40% in the next 20 years. This increase in global energy demand is a reason to be bullish on the long-term fundamentals of the ultra-deepwater business. To meet this increased demand, RIG has constructed two new deepwater rigs that are expected to commence operations this summer. Additionally, RIG has started constructing two more ultra-deepwater floaters that will be available in 2017-18.

Furthermore, Transocean is currently in the process of producing five new high-specification jackup rigs. Transocean's fleet utilization increased from 75% in Q4 of 2013 to 78% in Q1 of this year. This increased fleet utilization has helped to bolster revenues and the management at Transocean is committed to keep increasing the efficiency of the fleet. In fact, Q1 revenue efficiency was 95.7%, which is its highest since 2008.

Transocean's management remains dedicated to its $300 million cost-cutting initiative program as demonstrated through Q1 as the company cut operating and maintenance expenses again. RIG's total expenses in Q1 were $1.27 billion, which is 13% lower than Q4 of 2013. The company's continued commitment to find ways to cut costs, while still developing new rigs for its future growth, will continue to increase its profitability over the long run. As an additional source of shareholder value, RIG recently increased its dividend to a robust $3/share, which based off of today's current share price is a 7.21% yield.

Potential Risks

In the offshore drilling industry day rates have been decreasing, which has led to a reduction in revenue for most offshore drillers, however RIG's day rates have actually increased, which has driven up revenue as shown in the Q1 results. Another concern about Transocean is that it will lose contracts to competitors due to its older fleet, however Transocean has clearly identified this as a threat as it has already commenced plans to build new, high-tech rigs.

The Verdict

Transocean is the premiere company in the offshore drilling space and will continue to be for the foreseeable future. Transocean has been a beaten-down stock over the past six months, but this sell off is completely unjustified. The company has consistently beat earnings estimates and the company's excellent management continues to invest in its future to provide long-term growth and has consistently created shareholder value by regularly increasing its dividend. At current valuations, RIG is a strong buy and is the perfect contrarian play. I am long RIG and in the next two years the stock will hit $60.

Disclosure: I am long RIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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