The 2010 oil spill in the Gulf of Mexico delivered a crushing
blow to the offshore-drilling industry.
Not only did it cause financial damage in the form of lawsuits
and lost revenue, it also took a huge toll on public sentiment.
Many investors simply lost their appetite for offshore drillers.
That drove big capital outflows from the group, pushing the
industry to record low valuations acrossearnings andcash flows.
But now, almost two years after the spill wreaked havoc in the
Gulf, offshore drillers are back on the upswing -- a recent surge
in drilling permits from the department of energy is driving demand
for offshore drilling services.
This mirrors a larger global trend: Offshore drilling projects
in the Gulf are expected to stretch into Cuban and Mexican waters,
and new finds off the coast of Africa, Brazil and in the
Mediterranean expected to fuel additional demand for
With many exploration and production companies increasing their
budgets tocapitalize on high crude prices and the big bounce in
natural gas in the last six months, capital spending in 2013 is
expected to also get a boost. That has analysts at Morgan Stanley
projecting a huge year for offshore drillers in 2013.
When you add all these factors together, analysts are projecting
2013 as the beginning of a two-year cycle in which the
offshore-drilling industry is expected to grow sales between 13%
and 15% annually.
So with many offshore drillers trading at multi-year lows,
valuations at record lows and analysts calling for two years of
sustained sales and earnings growth, this is the perfect time for
investors to jump ahead of the curve and buy offshore drillers
while they are still out of favor.
Although there are many good stocks in the drilling space,
Diamond Drilling (
Noble Corp (NYSE: NO)
Seadrill Ltd (Nasdaq: SDRL)
to name a few, my favorite is
Transocean Ltd. (
. Here are six reasons why it is time to buy the world's largest
1. Permits on the rise in the Gulf
As I mentioned earlier, the U.S. Department of Energy has
issued a lot of deep-water drilling permits in the Gulf of
Mexico this year. In fact, it has issued more in the first
nine months of 2012 than it has in any year since 2007.
Through late October 2012, the DOE has issued 90 new drilling
permits for wells deeper than 500 feet, eclipsing the total
number of permits issues in the past two years and the two
years before the spill. But in spite of these gains, the
current total Gulf oil production of 1.3 million gallons per
day is still down from pre-spill daily levels of 1.7 million
gallons in 2009. This means there's still plenty of slack in
Gulf-drilling demand thatwill benefit an integrated offshore
driller such as Transocean.
2. Land oil is becoming scarcer
Exploring and extracting crude and natural gas is a lot
easier on land than it is underwater. But two-thirds of the
entire planet is covered with water, forcing energy companies
to shift into offshore drilling as wells on land continue to
dry up. This is exactly what is happening to some of Saudi
Arabia's largest oil fields: A recent report from Citigroup
projects the country could run out of oil to export by 2030
as reserves run low after 50 years of heavy production.
An ultra-deep water specialist
Transocean is the largest offshore drilling company in the
world with amarket cap of $17 billion. Although Transocean
operates in shallow, mid- and deep-water markets, its bread
and butter is the ultra-deep water segment. That makes the
company uniquely positioned to capitalize on deeper finds in
more exotic locations of the world. These also happen to be
the most challenging and highest-paying contracts on the
market, making Transocean's expertise and leading market
position even more valuable.
Day rates are jumping
The combination of growing number of permits in the Gulf of
Mexico and new global projects has pushed day rates for
deep-sea rigs higher. In September, Transocean announced a
20-month extension for its GSF Development Driller I, in
which its day rate jumped to $580,000 from $522,000. The
company also announced itsbacklog had jumped an impressive
$1.7 billion, with $652 million of that total coming on a new
three-year contract for its new Deepwater Invictus platform.
Scheduled for delivery in 2014, the Invictus secured a robust
day rate of $595,000.
5. Estimates are surging
All of this bullish news is hitting estimates for
Transocean hard. Since reporting strong third-quarter
earnings of $1.37 per share less than a month ago, blowing
past estimates of 76 cents by 80%, analysts have been
revising growth projections higher. In just the last 30 days,
the current-yearearnings estimate is up an impressive 19%,
jumping to $3.39 a share from $2.85 a share. Analysts also
became more bullish in the long run, with the full-year 2013
estimate to $4.86 a share, a very bullish 43% earnings growth
projection. In the next five years, analysts are looking for
average annual earnings growth of 21%, well ahead of the
industry average of 13%.
A Historically-low valuation
But in spite of all the good news, the Street doesn't seem to
care much. Transocean is still trading with a ridiculously
low valuation. Its price-to-earnings/growth ratio (PEG ) of
0.47 is just 35% of the S&P 500's 1.33, below the
industry average of 0.67 and below its 10-year average of
0.56. If Transocean were to merely trade with the same
valuation as its industry peers, thenshares would jump to
$66, a 43% increase from current levels.
Risks to Consider:
Energy stocks are extremely sensitive to economic cycles and
growth. There is still plenty of uncertainty about global growth
due to weakness in China and Europe. If the global gross domestic
product continues to look soft, then it could fuel further capital
outflows from energy stocks.
Action to Take -->
Transocean is the undisputed leader in offshore drilling. But
shares have fallen sharply in the past 18 months. Don't wait for
everyone else to catch on this idea. Buy the stock now, while it's
still ridiculously cheap.
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