Transocean

Transocean (RIG – $50) is the deepwater driller that was involved in drilling the BP Macondo well. That spill has created a valuation opportunity for RIG. BP and the government and everyone else involved (including RIG) is going to spend the next few years and millions of $$$ litigating this to try to get someone else to pay. While I doubt that RIG will ultimately end up paying much, this is still a risk for the stock — and the legal expenses are guaranteed to be money down the toilet. In the short term, the shares are now probably owned mostly by daytraders and other technical trading types – and so will likely remain volatile until the volume dries up and the shares end up in the hands of value-oriented institutions. But that could be pretty close to the current price.

Valuation — RIG is trading at 10 year valuation lows (PE 5; PB 0.7; PS 1.3; PCF 3) and in the range of the 2008 lows (when oil dropped to $40 or so). Seems to me that a lot of uncertainty is already baked into the price — though yesterday’s price was certainly a better buy than today’s. Going forward, the economic slowdown is going to have an impact on all drilling — and the spill and RIG’s role in it is going to affect deep-water drilling worldwide. But RIG dominates the deep-water drilling market and that dominance won’t change quickly — and buying deepwater rigs for 70c on the dollar (book value is roughly $64/share) seems like a pretty good price to me.

Management — Because RIG has more than 2x as many deepwater rigs as its nearest competitor, it has far more ability to set contract prices than anyone else. Like everyone else in the industry, it never pays shareholders and when it buys back stock it pays far too much. And it tends to plow excess cash into building yet more rigs at far too high a price. And hence the debt load is too high for my liking. But overall, RIG is in better shape than the rest of its industry — and oil ain’t going away — and RIG does have a multi-year backlog. Basically, management has created a trading roller-coaster rather than an investment — but as long as that’s known going in.

Technicals — Pick your favorite indicators and trade with them. Only real difference between this and a momo stock is that I do think there is a lot less downside risk here because rigs are real assets and cost a lot and there doesn’t seem to be a huge downside risk in the price of oil either. Big speculative money is definitely using oil as the anti-dollar hedge — and while that is screwing the economy bigtime and ensuring a truly crappy future for the US — it will not change until the big speculative money dies. And that doesn’t seem to be on the horizon since they own the government. Until the spill, RIG traded at a pretty consistent 90%-130% of the WTI crude oil price (even during 2008). Now its at 63%. The spill may have changed the permanent ratio a bit — but once those types of traders get comfortable with RIG again, they will no doubt return with all their hedges/leverage/etc.

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