Penn Wealth Publishing

2015.01.25 Journal of Wealth & Success Vol 3 Issue 4

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10 wealth & success volume 3 issue 4 January 25, 2015 wealth & success Copyright 2015. All Rights Reserved. investment intelligence Suitable for the Global Leaders Club Energy Equipment & Services Transocean Limited Buy the world's largest offshore drilling company at a deep discount—and get a 17% income stream thrown in. Certain opportunities simply don't come along all that often. Fortunately for the astute, they often arrive on the doorstep when the doors are locked and bolted. Such is the case with the stellar deepwater drilling contractor, Transocean, Limited RIG . Few expected oil prices to plummet from $108 per bar- rel to below $50 per barrel so quickly (though we did have a triple-inverse oil and gas holding in the Intrepid account until it hit $80), and when the panic selling took place this past week, RIG prices plummeted to under $16 per share (down from a 52-week high of $55.74). We took the opportunity to add this juggernaut to our Global Leaders Club at $17.50 per share, with a price target of $44. In the Global Leaders Club (as opposed to the Intrepid Trading Platform), companies have the luxury of hanging around for the long-term, due primarily to their leader- ship role in the respective industry. This company would be equally at home in the Strategic Income Portfolio, how- ever, considering its Texas-sized dividend yield of 17%. History of the world's largest offshore driller. Though today it is Swiss-based, Transocean can trace its roots back to the early 1950s in the southern United States. In 1954, the company that would become RIG launched the first jackup rig in the Gulf of Mexico (picture the earli- est manifestation of the behemoth shown in the top left of this page to understand the definition of a jackup rig). The mid-1950s saw the company develop the first post- type swamp barges, the first drillships, and the first subsea production wells. As a young stockbroker, I loved to trade a well-run drilling firm named GlobalSantaFe, stock symbol GSF, which was based out of Houston, Texas. In 2007, a merger between GSF and RIG was announced, with the com- bined company being known as Transocean. In 2008, Transocean moved its headquarters to Switzerland. Global reach in harsh waters. Today, RIG operates in all major offshore regions, including the Gulf of Mexico, the North Sea, the Middle East, and off the coasts of Africa, the UK, Noway, Brazil, and Canada. It specializes in operating under the harshest and most tech- nically demanding deep sea conditions. It has a fleet of 48 high-spec rigs, 22 midwater floaters, and 9 jackup rigs. The firm employs 15,000 worldwide. To be sure, there are reasons that the price per share of RIG has fallen. Specifically, the unsystematic, industry- wide risk of falling oil prices has pounded the drillers in particular and the energy sector overall. Additionally, there are a large number of ultra-deep-water rigs coming online in early to mid 2015, both newbuilds and current beasts coming out of contract. Two key factors to look at in this industry are dayrates and utilization. RIG contracts with national oil companies (like Brazil's Petrobras), independents, and international oil companies. Within the contract, the customer will agree to pay a certain amount of money for the contracted period. By dividing the total contract cost by the number of days in a contract, you arrive at the dayrate. Dayrates for submersibles have dropped from the $600,000 price range to the $425,000 average range as of late. The utiliza- tion rate will fall as more rigs become available. Projected performance. These factors, we believe, have been baked in (over-baked in our opinion) to the price of the stock. OPEC won't allow oil prices to stay low forever, and there are a lot of deep- sea oil patches yet to be discovered. In the meantime, we will take a 17% dividend yield on the world's strongest off- shore drilling company. If anything, low oil prices might just knock off some competitors, making the space even more lucrative for RIG as prices rebound.

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