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.)