Wednesday, May 5, 2010

Opportunity in TransOcean shares (RIG,BP)

TransOcean (RIG) shares look interesting on their big drop after the Deep Horizon disaster, and offer nice upside from here.  While the oil escaping from the sea floor has not been slowed, it turns out that the oil on the surface will not reach land as soon as expected.  Winds and current have been a major help, and the more the oil is dispersed, the better the chances are that it will sink.  It's being described as a "thin sheen" that is in large part harmless, so thin in fact that crews have had difficultly burning it off.

Valuation.
The shares are cheap on a P/E basis, trading at 6-8times eps depending on which year's eps is the denominator.  Free Cash Flow has been held back by enormous capital expenditures, but as those come down the company looks to have a Free Cash Flow Yield of 13-16% this year or next, excluding one time damages and costs related to this event.
Spill-related damages
The company's insurance coverage is limited, but they are to a large extent covered by BP (the client).
The biggest risk for TransOcean is that they are an "all-in" bet on offshore drilling.  The reason many people own shares is because drilling is becoming more difficult and dangerous, and RIG is the premiere supplier of expensive solutions for the integrated oil companies to get at the world's greatest remaining oil fields.  The risk of an offshore oil moratorium in the US is probably not all that high.  Sooner or later, we need the resources, and if the US doesn't allow it off its coasts, then foreign firms will come in and drill anyway.

RIG's fleet, it should be noted, is scattered all around the globe, so any action by the US on new (existing work would be largely unaffected) offshore activity will be damaging but certainly not disastrous to the bottom line.  Here is the breakdown of the company's 44 "floaters," and their current locations.

Copyright 2010 AlphaNinja

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