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Transocean: Beyond The Horizon

 February 11, 2013 03:46 PM

by Paul Goodwin, editor Cabot China and Emerging Markets Report

The biggest story in the energy industry has been a shift from land-based wells to offshore drilling and production. This kind of drilling relies on highly specialized, very expensive drilling rigs, some of which can go ultra-deep to find big reserves.

Transocean (RIG), which is technically a Swiss company, owns or has partnership interests in 155 mobile offshore drilling rigs in use around the world and is the industry leader in drilling where it's wet.

Its exploration platforms include specialized rigs designed to operate in deepwater, ultra-deepwater and harsh environments from drillships and semisubmersibles to jackups.

[Related -7 Deep-Value Energy Leaders With 68% Upside]

Its rigs are available on a number of contract types, from straight day-rate charters to turnkey drilling where Transocean does all the drilling and delivers a finished well that's ready for connection to a pipeline network.

Most of these rigs are deployed offshore of emerging market countries, with six in Indian water, nine offshore Brazil, six off Malaysia and over 20 off African nations. It's clearly an international growth story.

The Deepwater Horizon rig that was at the center of the Gulf Oil spill was a Transocean platform, and the company has reached a settlement with the U.S. Justice Department that allows the company to pay a fine of $1.4 billion in civil and criminal penalties, spread over five years.

[Related -Transocean LTD (RIG): Offshore Drillers Could Face Margin Pressure]

Another interesting development is that corporate raider Carl Icahn has accumulated 5% of Transocean shares, and is agitating for the company to pay a dividend of $4.00 per share.

The company's long-standing dividend program was suspended during the uncertain times after the Gulf spill, and investors are intrigued by Icahn's push to reinstate it at a high level.

Drilling restrictions and compensation to victims of the Gulf disaster caused three years of reduced revenues and pulled EPS from $11.39 in 2009 to $1.49 in 2011.

But 2012 likely brought $3.47 in per-share earnings, increasing to $4.81 in 2013. Q3 results featured a 1,145% jump in earnings on a 23% gain in revenue. All told, the firm has a whopping $30 billion of contracted backlog!

RIG began the year at $45, but took a major leap up when news of the settlement with the Justice Department came out. With a positive outlook for oil demand, active improvements in its fleet and a reasonable forward P/E ratio of 12, RIG looks like a good risk/reward balance here.



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