Green Shoots for One Driller

07/28/2009 4:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

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.http://jubakpicks.com/wp-includes/js/tinymce/plugins/wordpress/img/trans.gif

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.)

For the rest of my Jubak's Picks portfolio, follow this link to JubakPicks.com.

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