Stock of the Week
NYSE Symbol: RIG
Industry: Oil drillers
Price as of 12/23: $69.32
December has been very kind to investors as money managers position themselves for better economic and earnings numbers in 2011. The major averages have rallied nearly every day in December for a 6% return for the major averages. The commodities have been on fire except for the oil and oil drillers. Any oil company with exposure to the Gulf of Mexico is looking for 2010 to come to an end. This week we'll feature a controversial stock with some risk and plenty of reward if things go their way. The stock of the week is oil driller Transocean. Transocean found itself in the middle of the BP oil spill since it was their rig that BP leased that caused the spill. The bulls on Transocean contest that their contract is iron clad against any liability for the spill, but that hasn't stopped investors and the government from suing the company. One thing is for certain, the world needs more oil and the drillers will need to go back to work in the Gulf. Investors willing to take on some risk and wait out the litigation concerns should reap the rewards over the next several years as earnings improve.
Back on November 3rd, Transocean saw profits drop 48% for third-quarter due in part to rising costs and a sharp drop in revenue following the moratorium on drilling in the Gulf of Mexico. Net income fell to $368 million, or $1.15 per share, from $710 million, or $2.20 per share, a year ago. Revenue slipped to $2.31 billion from $2.82 billion a year ago. The company said that after the spill its expenses rose for legal costs, investigations and insurance premiums. Transocean owned the drilling rig at the center of the April explosion, which killed 11 workers. Transocean said in a regulatory filing that it has recorded a $116 million liability associated with the spill. A portion of that is recoverable from insurance and so far it has received about $87 million. As of Sept. 30th, 291 claims have been made against Transocean and affiliates in state and federal courts. In addition, 19 wrongful death complaints have been filed in state or federal courts in Louisiana and Texas. The company also is named in 70 individual economic loss lawsuits and 187 class-action complaints in nine Southern states. Looking forward, Transocean expects revenue for 2011 to be slightly higher than this year primarily due to increased drilling activity and the lifting of the moratorium in the Gulf.
The earnings and sales are set to reaccelerate for Transocean in 2011, however, the stock has been stuck in neutral. Currently the stock trades for 9.5 times earnings, 2 times sales, and just over 1 times book of $65.94 a share. Before the oil spill Transocean earned $11.40 a share in 2009 and a peak of $16.57 a share in 2007. Transocean's earnings should start to move back in that direction in the coming years as the litigation fears fade. In the short term, there is headline and litigation risk, but long term Transocean is well positioned and should continue to churn out strong profits.