Transocean Investors, Now Is the Time to Buy More Shares
NEW YORK (TheStreet) -- For the past eight months, anyone investing in offshore drilling giant Transocean
Shares, at around $39, are down more than 21% on the year to date, trailing the energy sector's 14% gain. Transocean reports second-quarter earnings Wednesday.
But don't worry. Given Transocean's status as the world's largest offshore driller and its dominant position in the ultra-deepwater float industry, now is the time to buy. The market has gotten this story wrong.
With the stock trading at just nine times trailing earnings, these shares are cheap.
Rivals Cameron International
At some point the market will realize its mistake. With the company's strong backlog and ample cash supply, Transocean is poised to rebound. With a noticeable increase in global energy spending, the stock will be a beneficiary of that demand, reaching $45 to $48 per share in the next 12 to 18 months. Here's why.
First, contrary to popular opinion, the company's fleet of rigs is not the Achilles heel it is perceived to be. The company has roughly 92 units that are either in operation or are under construction. Within this fleet, Transocean owns close to 30 floaters.
The floaters are seeing strong demand, particularly the high-spec floaters, which is now contributing close to 75% of total revenue. Only Seadrill
Secondly, Transocean is no longer dealing with excessive downtime issues. In the most recent quarter, total average day rates jumped 14% year over year. This meaningful increase demonstrates how management's efficiency improvements are beginning to work. The company is also focusing on value creation.
To that end, management is looking to divest its drilling services segment by the end of this year, which will help Transocean achieve a higher-yielding asset base. This combined with management's plan to spin-off a portion of its mid-water floaters, will allow the company to decrease its costs.