A Driller That Spans the Globe
11/01/2007 12:00 am EST
Charles Carlson, editor of the Drip Investor, says Transocean, the world's largest offshore drilling contractor, is thriving on high oil prices and strong demand.
With oil prices above $90 per barrel, little wonder demand is high for oil-drilling equipment. A major beneficiary of this global demand is Transocean (NYSE: RIG), the world's largest offshore drilling contractor with 82 mobile offshore drilling units.
The firm is the largest "floating" rig driller with 53 semi-submersibles and drill ships.
Transocean's fleet of deepwater rigs can work in more than 4,500 feet of water.
To say that Transocean's expertise in drilling has been in demand of late would be an understatement. For the first time in Transocean's history, the fleet-wide quarterly average day rate exceeded $200,000 in the second quarter. Over the same period, rig utilization rose to 91%. Given those high prices the company's products are commanding, profits have been flowing.
Record profits are expected this year: per-share profits are expected to reach $7.92 this year and $11.31 per share in 2008. Long-term prospects are enhanced by the pending merger with Global Santa Fe, a leading provider of drilling management services worldwide.
The combined company will have a global fleet of 146 rigs and broad international exposure. That international exposure is one factor that sets this firm apart from other drilling companies. Under terms of the merger, Transocean shareholders will receive $33.03 in cash and 0.6996 shares of the combined company for each share of Transocean they own. The cash received by Transocean shareholders will be accounted for as a special dividend.
The deal is expected to close by the end of 2007. If investors are concerned about the tax hit from the special dividend, they could wait until after the merger is completed before taking positions.
Transocean trades at 14x expected 2007 profits and ten times the 2008 earnings estimate. Given that the firm has handily beaten analysts' earnings estimates over the last four quarters, profit estimates for 2007 and 2008 may prove conservative.
Of course, what happens to oil prices will have some impact on rig demand, and there does appear to be some softening occurring in daily rig rates. Nevertheless, barring the bottom falling out of the oil market-something that seems unlikely-drilling demand should remain steady even if oil prices retreat to the $70 level.
Please note that Transocean's direct-purchase plan allows any investor to buy shares directly, the first share and every share. Minimum initial investment is $500. Transocean is a buy at current prices. (It closed above $119 Wednesday, near its all-time high-Editor.)