Monday, November 16, 2009

Free Cash Flow Yield chart of the day - Transocean (RIG)

Transocean (RIG) is an offshore contract drilling company, offering deepwater and harsh-environment oil well services and platforms.

After a big run off the March lows, are shares still a good deal? As I said to a friend today, I'd give them a rating of "Buy-Light." That's like a lukewarm Wall Street rating of "moderate outperform," or "long-term Buy."

The company has had massive capital expenditures as of late, which should relax in 2010, giving a big boost to Free Cash Flow.

2009 is suffering from, among other things, over-supply in the industry. With oil prices well off their highs, pricing is also tough for contract drillers like RIG. The following International Energy Association slide from a recent London presentation shows the industry's dramatic pullback in spending in 2009:

Transocean shares were a HUGE bargain earlier this year when they sported a Free Cash Flow Yield (FCFY) in the mid-teens -->> a preposterously high number for a company with effective interest rates on its debt below 5%.

The shares currently yield 11%, a pretty decent yield that compensates for the risk of cancelled contracts and continued weak industry pricing dynamics.

Copyright 2009 AlphaNinja

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