Green Shoots for One Driller
07/28/2009 4:48 pm EST
By: Jim Jubak
One robin doesn't make a spring. And one new drilling contract with a higher price than the expiring one doesn't make a turn in the drilling sector. But springs are built one robin at a time and turns in depressed industries begin with a single contract.
And that single contract leads me to nudge up my target price for shares of Transocean (NYSE: RIG) in my Jubak's Picks portfolio.
On July 20th, Petrobras (NYSE: PBR) announced that it would lease a deepwater drilling rig from Transocean at a rate of $510,100 a day. That's a 4% increase from what Transocean got on the rig, the Cajun Express, during the contract with Chevron (NYSE: CVX) that expires at the end of 2009.
A 4% increase isn't much-hey, it might just cover the loss from a weaker dollar. But considering that the last news from Transocean was that it had stacked-that is, temporarily pulled out of service-nine rigs with the definite possibility of stacking another five to ten in 2009, even a small increase qualifies as good news.
Day rates for its jack-up drilling rigs had tumbled 40% from their peak in 2008. But that's actually a pretty decent performance: In the collapse from 1997-1999, rates fell by 70%. The rebound in drilling activity isn't at hand-although the climb in oil prices back to $70 a barrel sure helps-but with 136 ocean drilling rigs (including 39 deepwater rigs), Transocean is by far the company best positioned in the world to profit from a post-recession expansion of deepwater drilling.
However, if you're skeptical about a widespread turnaround in the oil service sector, you don't have to look any further than Schlumberger (NYSE: SLB).
Second-quarter profit at that company fell by 57% on the collapse of drilling activity in North America. Revenue fell 18% in the quarter from the second quarter of 2008.
The only good news? Management says it sees signs of "stability." That's not the same as "improvement." In this case, I think it simply means that while business is still getting worse, it's now getting worse at a more orderly pace.
As of July 28th, I'm upping my target price for Transocean to $91 a share by March 2010 from my previous target of $85 by that date. It closed above $79 Thursday. (Full disclosure: I own shares of Transocean in my personal portfolio.)