Have you got the patience to hold this one for the turn in the off-shore drilling market?
It’s clear that many investors in Transocean (RIG) don’t. The stock was down 5.5% for the day (February 24) after the company yet again pushed out the recovery for its deep-water and mid-water drilling rigs when it reported fourth quarter 2009 results.
For the quarter the company reported earnings of $2.24 a share and revenues of $2.55 billion. Given all the one-time items in the quarter (such as a $48 million charge related to taxes and the GlobalSantaFe merger), it’s not clear to me how the reported $2.24 compares to Wall Street’s projection of $2.56 in earnings. What is clear is that revenues, which fell 10% from the fourth quarter of 2008, came up short of the Wall Street consensus by about $280 million.
But I think it’s the conference call that did the real damage to shares on the 24th.
The company said it was optimistic that the market for jackup rigs was strengthening. This is crucial for Transocean since its merger with GlobalSantaFe was predicated on the value of that company’s large fleet of technologically sophisticated jackup rigs. (Jackup rigs are off-shore drilling platforms that operate in water depths up to 400 feet or so.) But at the same time Transocean also told investors that it idled three more jackup rigs since its last conference call. That brings the number of idled jackup rigs to 28.
The ultra-deep water drilling market, the company’s strength before the fourth quarter 2007 merger with GlobalSantaFe, looks healthier. Deep-water fleet utilization is 100% for 2010 and 86% for 2011 with several companies expressing interest in leasing Transocean’s four available deepwater rigs for 2011.
The company continued to pay down debt in 2009 with long-term debt falling to $9.8 billion from $12.9 billion at the end of 2008.
But with cash flow from operations hitting $5.6 billion for all of 2009, the company still has more cash than it can use to pay down debt (in this low interest rate environment it doesn’t pay to reduce leverage beyond a certain point) or invest in new rigs.
So the board of directors has authorized a $3.2 billion share buyback program and will request shareholders at the company’s annual meeting on May 20 to approve a special dividend of $1 billion, or about $3.11 a share at current exchange rates, payable to shareholders in equal distributions in July and October 2010 and January and April 2011.
I’m disappointed that the turn in the rig market is taking so long but Transocean is still the best positioned company to benefit from that turn.
As of February 24, I’m leaving my target price at $105 a share by extending the time table to November 2010 from June.
Full disclosure: I own shares of Transocean in my personal portfolio.
Jim- I’d love to hear your take on SLB and the Smith buyout, too- altho I think I can guess most of it. Thx as always.
[I’m holding out for a $56 entry point at the moment, but that may change… ;]
taterbug,
I’d buy SBAY at $11. It’s over $13 now. If you already own it, I’d hold onto it.
chemace,
Thank you!
thanks bsdvg
I’ll look into the DIY option
nmac:
> what is the beta (its relationship to overall market performance) on my portfolio,
There doesn’t seem to be a formula that ties the beta of individual stocks to the beta of a given portfolio. Calculation the beta of a portfolio from scratch using a spreadsheet should be straightforward though: 1) Create 2 columns containing rate of returns for your portfolio and the S&P over a period of time. 2) Calculate the covariance between the 2 columns. 3) Calculate the variance in S&P. 4) Divide the covariance by the variance to get the beta on your portfolio. Excel has macros for calculating the covariance and variance. Does anyone have a better idea?
For theory:
http://en.wikipedia.org/wiki/Beta_(finance)
Ed, what’s up with SBAY. Is it at an entry point?
Jim,
Love the site. Ed and all the other regular contributors thanks for the insight you guys add so much to the site you should be on the payroll
nmac,
Nearly any site will tell you what the beta on an individual stock is. As for the beta of your portfolio, I personally don’t put much faith in that. Pay attention to your trees and the forest will take care of itself.
EdMcGon
Thanks for your input and I agree with your synopsis. I guess what im trying to find out is what is the beta (its relationship to overall market performance) on my portfolio, its easy to get the info on a stock by stock basis but I believe there are sites that will analyse your portfolio and give you this output but i just cant find them…
Jim,
I have to second nmac’s question. I’d be curious to hear what sites you use to track your portfolio and/or to do general stock research?
nmac,
Exactly how much diversification do you want? You don’t need a site to tell you whether you’re diversified.
As a general rule, I try not to let any of my individual holdings go above 10% of my portfolio (exception: cash). As for sectors, like emerging markets, I don’t restrict my holdings there as long as multiple industries are represented.
I know a lot of financial advisers will tell you not to load up in any one industry. IF you know the industry, and you have reason to believe that particular industry has reason to benefit in the economic short or long term, THEN I don’t have a problem with increasing the weighting of that particular industry. Although if you end up with 50% of your portfolio there, you probably have too much. I would limit my risk to 30% of my portfolio, but even then you’ll have to watch it like a hawk. Remember, when you play an industry like that, any bad news in one company can be interpreted by the market to be bad news for the entire industry. However, if what you TRULY want is diversification, then I’d limit my holding in that industry to 10%, with an absolute top of 20%.
On a side note, if you get overly diversified, be prepared to spend all your time following stocks. It is better to be under-diversified and following all your stocks religiously, than to be over-diversified and not following your stocks at all. “Buy and hold” is NOT “buy and forget”.
Hi Jim &Co
im a long time reader first time poster.This is a great site. Well written articles and interesting debates. I have a question thats a bit off topic, Jim which sites do you use to monitor track positions, look at technicals etc. I would also be interested in any other posters suggestions . In addition I am looking for a site that will measure the diversification of my portfolio, anyone got any suggestions? thanks in advance for your help!
Re: ORA.
That one’s hurting me, too. But 1.64% up after hours, so maybe it will bounce back a bit. What’s with Israeli stocks in general anyway? Is it Iran or Eurozone?
Jim,
I know you like SLB as well and it took a hit on the acquisition news. With RIG and SLB down right now do you have a strong preference between them?
Thank you!
Hi Jim,
Could you also provide an update on ORMAT technologies (ORA) which is part of your portfolio? They reported today – earnings seemed to be pretty good, but the stock price still got whacked!
Cheers.