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.

Its August 5 report of second quarter earnings was certainly grim. The company missed analyst estimates by a huge 24 cents a share. Revenue fell by almost 8% from the second quarter of 2008 as the company took more of its relatively shallow water jackup rigs (depths of 400 feet or less) out of service and stacked them due to a lack of customers for these platforms.

But the company still generated $1.6 billion in operating cash flow. That enabled Transocean to pay down debt by $911 million (to 12 billion) during the quarter, and to pursue plans to buy some of the deep-water rigs now being offered on the market by cash-strapped (or bankrupt) creditors and construction yards. At the company’s annual meeting shareholders also approved the company’s plans to repurchase up to $3.2 billion of the company’s stock.

In other words, it looks like Transocean will come out of this global slowdown–which certainly qualifies as a recessoin for oil drilling and service companies–as a stronger player with fewer competitors. When the recession for drillers will end is still an open question. But business does look like it’s improving in the market for deep water rigs where Transocean is the biggest player. Petrobras (PBR), for example, looks like it will put out requests for bid on 30 deep water rigs in the second half of 2009.

Full disclosure: I own shares of Transocean in my personal account.