Update Transocean (RIG)

02/24/2010 4:37 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Have you got the patience to hold this one for the turn in the off-shore drilling market?

It’s clear that many investors in Transocean (RIG) don’t. The stock was down 5.5% for the day (February 24) after the company yet again pushed out the recovery for its deep-water and mid-water drilling rigs when it reported fourth quarter 2009 results.

For the quarter the company reported earnings of $2.24 a share and revenues of $2.55 billion. Given all the one-time items in the quarter (such as a $48 million charge related to taxes and the GlobalSantaFe merger), it’s not clear to me how the reported $2.24 compares to Wall Street’s projection of $2.56 in earnings. What is clear is that revenues, which fell 10% from the fourth quarter of 2008, came up short of the Wall Street consensus by about $280 million.

But I think it’s the conference call that did the real damage to shares on the 24th.

The company said it was optimistic that the market for jackup rigs was strengthening. This is crucial for Transocean since its merger with GlobalSantaFe was predicated on the value of that company’s large fleet of technologically sophisticated jackup rigs. (Jackup rigs are off-shore drilling platforms that operate in water depths up to 400 feet or so.) But at the same time Transocean also told investors that it idled three more jackup rigs since its last conference call. That brings the number of idled jackup rigs to 28.

The ultra-deep water drilling market, the company’s strength before the fourth quarter 2007 merger with GlobalSantaFe, looks healthier. Deep-water fleet utilization is 100% for 2010 and 86% for 2011 with several companies expressing interest in leasing Transocean’s four available deepwater rigs for 2011.

The company continued to pay down debt in 2009 with long-term debt falling to $9.8 billion from $12.9 billion at the end of 2008.

But with cash flow from operations hitting $5.6 billion for all of 2009, the company still has more cash than it can use to pay down debt (in this low interest rate environment it doesn’t pay to reduce leverage beyond a certain point) or invest in new rigs.

So the board of directors has authorized a $3.2 billion share buyback program and will request shareholders at the company’s annual meeting on May 20 to approve a special dividend of $1 billion, or about $3.11 a share at current exchange rates, payable to shareholders in equal distributions in July and October 2010 and January and April 2011.

I’m disappointed that the turn in the rig market is taking so long but Transocean is still the best positioned company to benefit from that turn.

As of February 24, I’m leaving my target price at $105 a share by extending the time table to November 2010 from June.

Full disclosure: I own shares of Transocean in my personal portfolio.

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