Wednesday, May 7, 2008

Transocean: Best Company In The World

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.

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.
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.

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.

1 comment:

Anaconda said...


Stocks that are highly valued, are over valued unless significant growth is on the horizon.

Transocean is a highly valued stock. (Close to its 52 week high, and analysts' estimates place it toward the upper reach of it's trading range.) So the question sits squarely: Is there potential for significant growth of Transocean's core business?

The answer is yes.

The company itself, of course, sees growth as evinced by its massive investment in "Enterprise" class discovery ships -- "Where No Man has Gone Before." And with a capacity of drilling in up to 12,000 (beyond record depth) feet of water and 40,000 foot total drill depth (with an astounding 28,000 feet of below ocean floor depth capacity at water depth limit), drilling where the oil geologists and engineers direct will not be a problem.

Transocean is at the cutting edge of technology and expertise, both in absolute reach to the sea floor and economic efficiency.

Over capacity is the danger.

But with oil safely over $100 a barrel and news widely disseminating of the slew of Brazilian deepwater oil finds and Chevron's "Human Energy" ad campaign highlighting deepwater, deep-drilling success in the Gulf of Mexico, the risk of over capacity is limited.

Both investors and the general public are aware of deepwater potential.

Even Mathew Simmons has publically pointed to a "rig shortage."

Transocean's investments are anchored to deep oil in the deep blue sea.

Questions could be raised about whether deep oil has a large enough physical horizon to support Transocean's scale of investment, or are geological prospects limited to the Gulf of Mexico, Southeastern coast of Brazil, and the West coast of Africa?

But deep-drilling is going on all over the world -- and with many coastal countries without the capital or expertise to exploit their deep ocean mineral resources -- this is one of the true growth opportunities for rig operators and oil industry majors alike.

With 20 years hindsight this could be viewed as the "golden age" of offshore oil exploration.

Transocean is placed to catch the "big" wave; not just to ride it into shore, but to increase deepwater oil production to over a 50% share of total worldwide oil production.

Deepwater, deep-drilling is how the oil industry can bring total worldwide oil production over a 110 million barrels a day by 2020.

The oil industry and deepwater oil in particular can have their strongest growth ahead of them...

If investors "grab the brass ring."