Can Transocean Recapture Its Former Momentum?

With shares of Transocean (NYSE:RIG) trading at around $55.06, is RIG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

From 2005 to 2008, few stocks were hotter than RIG. The financial crisis was only the first blow for Transocean. The second blow was the Deepwater Horizon rig explosion and well spill. This didn’t just hurt the company’s financial situation and stock price; it also damaged the company’s reputation. Over five million gallons of oil were spilled in the Gulf of Mexico. This took place in April of 2010, and it was only six months after Deepwater Horizon drilled the deepest oil well in history at 35,055 feet. Deepwater Horizon was known as a lucky rig, but it’s amazing how quickly luck can change. Transocean recently announced a $1.4 billion settlement with the government in relation to the disaster. This is being looked at as a positive because it brings closure to the darkest time for Transocean and its investors.

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On a much brighter note, billionaire investor Carl Icahn just took a 1.56 percent stake in Transocean. However, he would like to increase that to a 5 percent stake. He is seeking regulatory approval for more voting shares. Mr. Icahn isn’t always correct, but he didn’t become a billionaire by making bad decisions. Mr. Icahn sees a bargain. Considering Transocean is a major player when it comes to international deepwater drilling, this makes sense.

Now let’s take a look at some important numbers. Maybe we will find some more clues as to why Mr. Icahn has so much interest in Transocean.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Transocean is normal. The balance sheet is in negative territory, and it will get weaker due to the settlement. However, the balance sheet shouldn’t be a concern at this time. If anything, the settlement can be looked at as a positive because we now know that Transocean will have plenty of cash remaining. This, in turn, could lead to dividend payments or buybacks, especially if Mr. Icahn has a significant say in matters.

Debt-To-Equity

Cash

Long-Term Debt

RIG

0.93

$6.00 Billion

$14.12 Billion

SDRL

1.65

$915.00 Million

$10.82 Billion

BP

0.41

$16.36 Billion

$49.08 Billion

 

T = Technicals on the Stock Chart Are Strong

Transocean is showing a return to strength. Over a three-year timeframe, the results have been poor, but there has been strong upward momentum as of late.

1 Month

Year-To-Date

1 Year

3 Year

RIG

23.25%

23.22%

38.74%

-36.67%

SDRL

4.46%

4.40%

24.66%

0.84%

BP

7.22%

6.58%

6.20%

-20.59%

 

At $55.06, Transocean is currently trading above all its averages.

50-Day SMA

46.76

100-Day SMA

46.89

200-Day SMA

46.73

 

E = Earnings and Revenue Have Been Inconsistent

It was a disastrous year for Transocean in 2010, and even worse in 2011. A recovery hadn’t seemed possible until recently.

2008

2009

2010

2011

2012

Revenue ($)in billions

6.38

12.67

11.44

9.47

9.14

Diluted EPS ($)

14.08

12.53

9.84

2.99

-17.79

 

When we look at last quarter on a YoY basis, we see an increase in revenue and a drop in earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.99

2.67

2.33

2.58

2.44

Diluted EPS ($)

-0.10

-19.04

0.12

-0.86

-1.06

 

T = Trends Support the Industry

Deepwater drilling is still in its infant stages. Many people like to talk about alternative energy. That’s nice, but there will always be an insatiable demand for oil, and Transocean will be one of the industry leaders for many years to come.

Conclusion

Only a few short years ago, you would have wished to own Transocean at these levels. Unexpected and unfortunate circumstances have led to this opportunity. If you choose to get involved, keep in mind that the stock’s Beta is 1.86, which means there will be a lot of volatility in the stock price. This isn’t a trade for the faint of heart. If you’re a long-term investor, then you don’t have to worry about short-term fluctuations. The long-term story for Transocean is a good one.

Transocean is an OUTPERFORM.

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