Update Transocean (RIG)
When it comes to offshore oil and gas drilling rigs, it’s a tale of two markets.
The market for jack-up rigs and shallow water semisubmersibles, the types of rigs used in relatively shallower water, is still taking beating. For example, in its latest fleet status report on October 9, Transocean (RIG) announced that it would stack (take out of service) an addition three jack-up rigs. That’s a total of 22 jack-up rigs and 6 mid-water floaters that the company has stacked.
On the other hand, orders for deep water rigs, the hottest part of the market, got even stronger in the third quarter with day rates on new contracts in many cases creeping higher. (Which is great for Transocean. After the merger with GlobalSantaFe in 2007, the company is the undisputed king of the deep water.)
Buy GulfMark Offshore (GLF)
Suddenly they’re hitting gushers from the Gulf of Mexico to the South Atlantic off Brazil to the west coast of Africa off Ghana and Sierra Leone.
The oil from these finds will eventually become critical to global supply—once the global economic downturn is over. The downturn has brought us what the International Energy Agency projects will be a two year slump in demand. If the global economy recovers relatively quickly, the agency projects, we could be facing another supply squeeze by 2014.
But these finds themselves look like their end another oil industry slump well before that. Deep water exploration suddenly seems to be headed to a boom. And that means we’re likely to see rigs coming out of cold stacking and starting to earn day fees again well before 2011, the year that many analysts had picked for a turn in the drilling industry.
In other words, the way to play these big deep water discoveries now is by buying shares in the drilling companies most likely to profit from an earlier turn in the sector’s fortunes. Read more
Update Transocean (RIG)
Think of a bad quarter–or two or three or…–as a test of a company.
If you are a long-term investor–and you are if you’re following my Jubak Picks 50–you see bad quarters as a test of a company’s strategy and management. What does a company do when earnings and revenue are plunging through the floor? Does it run for the shelter of whatever strategy is most expedient or does it take advantage of the downturn using the cash it hoarded during the good times?
Transocean (RIG) is most definitely passing the test. Read more
Update Transocean (RIG)
One robin doesn’t make a spring. And one new drilling contract with a higher price than the expiring one doesn’t make a turn in the drilling sector. But springs are built one robin at a time and turns in depressed industries begin with a single contract.
And that single contract leads me to nudge up my target price for shares of Transocean (Rig) in my Jubak’s Picks portfolio.
On July 20 Petrobras (PBR) announced that it would lease a deepwater drilling rig from Transocean at a rate of $510,100 a day. That’s a 4% increase from what Transocean got on the rig, the Cajun Express, during the contract with Chevron (CVX) that expires at the end of 2009.
A 4% increase isn’t much–hey, it might just cover the loss from a weaker dollar–but considering that the last news from Transocean was that it had stacked—that is temporarily pulled out of service—nine rigs with the definite possibility of stacking another five to 10 in 2009–even a small increase qualifies as good news. Day rates for its jackup drilling rigs had tumbled 40% from their peak in 2008. But that’s actually a pretty decent performance. In the collapse from 1997-1999 rates fell by 70%. The rebound in drilling activity isn’t at hand—although the climb in oil prices back to $70 a barrel sure helps—but with 136 ocean drilling rigs (including 39 deepwater rigs) Transocean is by far the best positioned company in the world to profit from a post-recession expansion of deep water drilling.
If you’re looking for signs that the good news from Transocean and Petrobras isn’t evidence of some widespread turnaround in the oil service sector, you don’t have to look any further than Schlumberger (SLB). Second quarter profit at that company fell by 57% on the collapse of drilling activity in N orth America. Revenue fell 18% in the quarter from the second quarter of 2008. The only good news? Management says it sees signs of “stability.” That’s not the same as “improvement.” In this case I think it simply means that while business is still getting worse, it’s now getting worse at a more orderly pace.
As of July 28, I’m upping my target price for Transocean to $91 a share by March 2010 from my previous target of $85 by that date. (Full disclosure: I own shares of Transocean in my personal portfolio.)
