After hearing Charlie Munger trash diversification over the weekend (see here, here, and here) I increased my already overweight (14%) position in Transocean (RIG) to well over 20%. Yes she's the prettiest girl in school but with a p/e of 9 it's not clear to me that everyone knows it. Does anyone know of another company that has profit margins and return on equity in excess of 30%? Q1 Transcript.
Transocean Is Coastin'
The margin picture, however, brightened meaningfully. Field operating income margins lifted from the upper 50% range into the lower 60s. Note that this includes all revenue sources, some of which are lower-margin than drilling, so the figure is understated compared to the contract drilling margins I tend to talk about when I praise Noble's (NYSE: NE) dynasty or ENSCO International's (NYSE: ESV) excellence.With 80% of deepwater drilling records, Transocean has a wide economic moat. The latest enhanced Enterprise-class drillship ordered from Daewoo costs $730 million. They already have 4 of these bad boys under construction (Discoverer Clear Leader, Discoverer Americas, Discoverer Inspiration, and the yet unnamed GSF Newbuild), each capable of drilling in 12,000 feet of water and to 40,000 feet total depth. The earliest a competitor can get one is 2011 and they would still have to pay Transocean for the patent on dual activity. This is a $50 billion company earning $4 billion a year and growing. Right behind Google (GOOG) in terms of estimated long term earnings growth.
I've talked about the tax rates of some of these drillers, which vary widely due to geographic factors. Diamond Offshore (NYSE: DO) reports about the highest rate that I've seen, while the two aforementioned aces fall in the high teens. Transocean did them one better, with an effective tax rate of 15.5% -- and that included some unfavorable items. This light tax treatment helped Transocean turn out a solid 38% net income margin.
Transocean's been scoring some big contract wins in India, an exciting basin that has been overshadowed by the exploration exhilaration in places like Angola and particularly Brazil. Reliance Industries, a bit like a Petrobras (NYSE: PBR) of India (granted, Reliance has more competition vis a vis ONGC), is exploring aggressively in what's known as the KG basin, offshore India. Yesterday's announcement of a new drillship order takes Reliance's deepwater vessel commitments with Transocean up to six, with three active rigs and both vessels from Transocean's joint venture with Pacific Drilling under construction. If Reliance hits anything like Petrobras' Tupi, Jupiter, or Carioca finds, then expect the fireworks to really fly.
Thursday's Options Report.
Transocean (RIG) – Sky-high earnings from the world’s largest offshore oil driller failed to patch through to any great effect to Transocean’s share price, which is .27% lower at $157.42 – about $3 off the 52-week high. While some analysts have noted that the company’s share price has already exceeded some targets, perhaps adding to the lackluster action, option traders responded in two fashions – first by appearing to sell May 145 puts and 160 calls in what could indicate an expectation of very rangebound share price activity in the coming month; then by deferring new price bets to the August contract, where we noted heavy volume in out-of-the-money calls at the August 170, 200 and 210 strikes, and selling action in 120 puts.I'm also a fan of National Oilwell Varco (NOV). Q1 Transcript.