Transocean (NYSE: RIG) Offers Relative Value Here
I read last Friday that Transocean Inc. (NYSE: RIG), one of my favorite oil services companies, had signed a record deal in the Gulf of Mexico with a dayrate of $581k for its Development Driller II. The contract, with BP (NYSE: BP), has the potential to be worth $1.06 billion. According the Credit Suisse, the previous Gulf of Mexico record dayrate was held by Pride International (NYSE: PDE), who got $540k just on May 1. This represents a 7.6% increase in about 7 weeks. Dayrates are higher elsewhere in the world, particularly in West Africa. This announcement should help put some teeth behind a move of Oil Services companies. The Oil Services ETF AMEX: OIH) has lagged the general Oil Contract ETF (NYSE: OIL), up only 13.15% (15.4% after dividends) compared to 43.88% YTD.
As for RIG, it has trailed its own Oil Services peers, up only 3.95% YTD. The company certainly seems to contain a lot of value relative to its peers. The PEG ratio sits below 0.5 with its forward P/E at around 9. The company’s backlog is impressive with around $35 billion in booked projects. The company also is a leader in its industry in cash flow generation.
I believe that RIG deserves to trade at a premium, not a discount, to its peers. Nevertheless, giving it a industry valuation average of 10.4 and assuming slightly aggressive earnings estimate of $19.25, I see RIG at $200 by the end of the year, or around a 34% upside.
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This entry was posted
on Monday, June 23rd, 2008 at 7:22 am and is filed under Potpourri.
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