Spotlight: Transocean (RIG) *updated tearsheet attached*
Two weeks ago, I mentioned that Transocean may have some near-term selling pressure following their approval to change the place of their incorporation to Switzerland and their subsequent removal from S&P 500 and the Russell 2000 indices. Transocean tumbled more than 26 percent in the seven trading days following the decision, and today trades at just more than three times earnings (the company’s has typically traded between 12 and 15 times earnings).
Also fueling the share price meltdown was CEO Bob Long’s comment last month that deepwater projects need $60-a-barrel oil to be economic. With oil hovering around $40-a-barrel, fears have grown that projects may be canceled. However, this is not a valid concern for Transocean since only 1 to 2 percent of their contracts can be canceled by client termination, and those particular contracts contain day rates far below market rates.
The deep-water market is positioned to expand substantially in coming years because of large deep-water discoveries, and Transocean has positioned itself as the prime beneficiary. The company’s $41 billion backlog (nearly three times its current market capitalization) and orders extending out to 2020, provide stability for the business and nice visibility into the future.
Noble (NE) is will likely be the next driller to change the place of their incorporation to Switzerland, and thus will be removed from the S&P 500 and Russell 2000 indices as well. Though much smaller than Transocean and less leveraged to the deepwater market, Noble’s $12 billion backlog (double the company’s current market capitalization) gives revenue visibility out to 2016. About 88 percent of Noble’s business is with national oil companies, giant public firms and large independents, thus the risks of customer financing issues are low.
Noble also provides engineering and consulting in addition to contract drilling services, giving the company a diversified revenue stream. Noble is contracted to build the largest ultra deepwater drill ship to be put into service in 2011, for $585 million. Out to 2011-2013, the deepwater market will become a larger proportion of Noble’s revenues, which should allow them to maintain wide margins.
Quick Hits
- Tallying the Trillions in Bailouts to Bankruptcies
- The Deals and No-Deals of 2008
- VIX Declines Below 40 as ‘Sheer Panic’ on Wall Street Recedes
Peter Lazaroff, Junior Analyst
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