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Transocean Reports Solid Earnings, Time to Short?

by: Trader Mark August 07, 2008 | about stocks: RIG    
Trader Mark

Trader Mark

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The same pattern we've seen in many oil service stocks played out in Transocean (RIG) yesterday. Solid earnings. Falling on deaf ears. Due to the mix of ships (they have a lot of shallow drillers who have much higher competition levels) I prefer some other names in the sector in the here and now, but for the long run RIG is bringing on the most supply of deep sea drillers which is where the real money is.

The chart is actually breaking out - unfortunately to the benefit of shorts, not longs. The 50 day moving average ($144) is quickly closing in on the 200 day ($136s) - the last thing you want to see is the 50 day to cross over and below the 200 day. This seems to be the fate unless things change quickly. For now, based on charts alone, this is a stock to be shorted/sold - not bought. In fact a very easy short with a nice stop loss over current resistance areas (I keep repeating that but many of these commodity charts look identical - i.e. broken) At $130 there is some support with March 2008 lows, but past that the next level down is $120 (January 2008 lows) and then it goes from there...

Despite providing a service that will be in demand at oil $60, $80, $100, $120, or $140 Transocean, like all the deep sea drillers simply seems to be a hostage to oil prices. In "theory" oil services should have some separation from direct Energy & Production companies, but theory only works well in the classroom. We'll keep track of the fundamentals just to keep ourself educated; also some word that cash flow is such that the company is seeking ways to return cash to shareholders (i.e. special dividend?)

Another company who provides extremely detailed earning reports. Hard to do apples to apples year over year comparisons due to the acquisition of GlobalSantaFe (GSF) last year.

  • Transocean Inc (RIG), the world's largest oil and gas drilling contractor, said second-quarter profit doubled, topping Wall Street estimates, on strong demand for its offshore rigs.
  • Transocean has seen rates for certain deepwater rigs top $600,000 per day as high crude oil prices prompt demand from exploration and production companies. Tight rig supplies have also helped push contract awards higher. The average daily rate paid for Transocean's drilling fleet rose 18 percent from a year earlier to $238,600 as contracts were renewed at higher rates.
  • Second-quarter profit rose to $1.1 billion, or $3.45 per share, from $549 million, or $2.63 per share, a year earlier. Analysts on average had expected a profit of $3.30 per share, according to Reuters Estimates.
  • Revenue more than doubled, soaring to $3.1 billion.
  • Day rates increased 4% sequentially and 18% year over year. Utilization rates across all rigs was 87% (down from 91% last quarter).

Disclosure: Author has no position.

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This article has 21 comments:

  •  
    Aug 07 12:48 PM
    Good luck with that.

    Long and proud.
    Reply
  •  
    Aug 07 12:53 PM
    Sounds like a million dollar investment thesis.
    Reply
  •  
    Aug 07 01:01 PM
    read if you can....les animaux malades de la peste...fable Jean de la Fontaine..to concude your long article , i will just say GOOD EARNINGS NEVER LIE. See you in 1 year.
    Reply
  •  
    Aug 07 02:02 PM
    Nobody wants energy stocks now, just like nobody wants straw hats in the winter, but that's precisely the time to buy.... when they go on sale.
    Reply
  •  
    Aug 07 03:23 PM
    I think your piece presents a better case to buy than short. You would have to have more guts than I have to short RIG or just about any energy stock.
    I believe RIG has the most deep-drilling rigs out there. They only have "a lot of shallow drillers" because of GlobalSantaFe. I don't think that is a negative. They have both deep and shallow drilling covered. RIG might be the single best name in the entire energy world now and for years to come. Good luck to anyone who shorts it for very long.
    Reply
  •  
    Aug 07 06:18 PM
    I'm long and holding. One comment in the call was that management is looking at various ways to return some of the record earnings to shareholders, possibly in the form of a special dividend. Wrong time to be short RIG!!
    Reply
  •  
    Aug 07 10:03 PM
    You want to short a company with a trailing PE of 8 & a PEG of .37? With no conceivable diminution of demand for its product on the horizon?
    Reply
  •  
    Aug 08 12:25 AM
    Article makes no sense to me, I am like others have mentioned more encouraged to buy long than to short.
    Reply
  •  
    Aug 08 01:10 AM
    This is the dumpiest thing I have ever seen on the Streets. RIG has doubled its profits and with a significant locked in hike in the day rate all the way through 2012, and yet the market treat RIG with a drop. From the sub-prime crisis to the way the oil price and the economy is handled, the Wall Street is really in need of some common sense intelligence.
    Reply
  •  
    Aug 08 01:43 AM
    Trader Mark,

    "Despite providing a service that will be in demand at oil $60, $80, $100, $120, or $140 Transocean, like all the deep sea drillers simply seems to be a hostage to oil prices."

    Once upon a time this was correct. In order to lock in longer term contracts, say 5 years, RIG has to agree to an adjustable rate. If oil falls bellow $80 for 30 days or more, rates come down drastically. The next downward adjustment would trigger around $60, then $40 etc. On the upside, oil would have to go above $180 for RIG to benefit.

    A typical $600K per day lease would have a $300K minimum triggered at around $45. This is the only way that both sides of the deal can do business. This is why RIG is looking to lock in as many long term contracts as possible as $120 or $140 oil is unsustainable, as proven over the past several months.

    The higher the price of oil when a rig is leased, the higher the trigger down-rate, though the starting base is so much higher (about double) than five years ago that it pays for RIG to get as many 5 year leases as possible.

    If you follow the dates when new long term leases are signed and correlate the info with the average (oil) price for the last 30 days, then you can guess where the trigger-down will occur. Obviously we won't know until this happens unless RIG and all of its competitors are willing to share the sensitive info.

    Very few, if any, are willing to sign non adjustable leases for over a year.

    Hope this helps.
    CrossProfit

    Above figures are just for educational purposes and are not to be taken at face value.
    Reply
  •  
    Aug 08 08:30 AM
    The same technical "breakdown" occurred in July 2006 when RIG traded at more than 20 times earnings, yet that proved to be a great buying opportunity for the stock at $70. For anyone with more than a very short-term perspective, RIG is a buy today.
    Reply
  •  
    Aug 08 08:55 AM
    From a technical standpoint Mark is absolutely correct.There is a huge head and shoulders pattern on afour year chart.

    RIG has just came up to theneckline and was rejected. The 1.272 extention is $60 dollars for a 1st target,
    Reply
  •  
    Aug 08 09:28 AM
    I appoligize, I had the wrong chart up.Rigappearstobe putting in a double bottomwit the neckline at $14.

    Sorry for the mistake.
    Reply
  •  
    Aug 08 09:29 AM
    Iam having my problems this am -

    The neckline is at $141
    Reply
  •  
    Aug 08 09:41 AM
    RIG is a buy!
    Reply
  •  
    Aug 08 02:28 PM
    My neckline is 14 1/2"
    Reply
  •  
    Aug 08 07:28 PM
    I keep thinking if $ 130 oil makes gas cost $ 4/gallon and that is supposedly unsustainable, then look at Germany where the gas price is an approximate double. Due to lack of alternative people drive anyway. To get a sense how much try one of those famous traffic jams like on the A8 between Munich and Salzburg during holiday season. This qualifies as discretionary idling - not even driving.
    Reply
  •  
    Aug 09 01:30 PM
    Oil is crashing, you can short anything in the space as a trade right now, it is under liquidation.
    Reply
  •  
    Aug 12 08:17 PM
    I really like this stock's long term prospects, as well as it's position in the deep water and harsh drilling environments. My only concern is their super low marginal tax rate the last few years. I guess they had losses extending back before this which they are now charging off, but once those tax credits end, their earnings are going to take a pretty serious hit...

    Does anyone have any ideas on this?
    Reply
  •  
    Aug 13 03:30 PM
    Drill, drill, drill equals buy, buy, buy. RIG is cheap at these levels and has great earnings visibility --- which is a lot more than you can say for Macy's.
    Reply
  •  
    Aug 14 01:49 PM
    RIG is a buy and I would be very careful shorting a name like this.
    Reply
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