Transocean (RIG)

RIG has also been producing an amazing string of earnings surprises over the last few quarters. Their balance sheet reflects a cash pile of $1.2 billion in this company. With a $46.1 billion market cap, RIG is the 800-lb gorilla in this space, and they have the $6.4 billion in annual revenues to prove it. RIG's annual profit margin is strong, and over $3.4 billion of that $6.4 billion-dollar revenue over the trailing twelve months has fallen to the EBITDA line. This gives a TTM EPS figure of $14.13 per share. Current expectations are for the company to earn $3.35 per share this quarter (March 2008 ending) on their way to an EPS figure of $14.06 for the 2008 year. The company maintains about $17 billion in debt, (those big jack up rigs in deep water are expensive!). That leverage has been the factor in this company's participation in the recent natural gas upsurge. As such, we like the position the company has built, and look for continued strong results the remainder of the year.

Oil Prices remain persistently high. This equates to high exploration budgets on the part of exploration companies. These oil companies lease Transcean's rigs for increasingly high dayrates under long-term contracts.

In the near term political uncertainty could weigh on the shares... but in the long run the business of drilling holes in the ground from which money flows isn't going away.

As we approach "peak-oil," the easy finds are likely to disappear, the remaining oil is likely to be in inaccessible places, leading to rising prices.

The super major oil companies may not benefit from the rising prices, as extraction costs will likely eat into the profit margins. Trans-ocean stands to capture a lot of that revenue.

Complex investment products that attempt to provide direct exposure to oil prices have a terrible tendency to enter a state of perpetual contango.

Basically you are getting a one-of-a-kind business at a price that values future cash flows at 0.

Transocean operates in the sector of offshore drilling with the highest barriers to entry: ultra-deepwater. In addition, the deepwater energy sector holds the most promise for new energy discoveries. Therefore, Transocean's rigs are in extremely high demand.

RIG is a prime beneficiary of high deepwater drill dayrates. Earnings per share have grown rapidly and will continue to do so for the forseable future due to long-term contracts with oil exploration companies. For example, Transocean recently announced a three-year contract with Anadarko Petroleum for a deepwater rig for $570MM (a dayrate of $500,000+).

Wall Street is pricing the stock as if earnings are experiencing a temporary pop. The forward PE is 9, while earnings per share are expected to grow 29% for the next 5 years. RIG benefits from lucrative long-term contracts with major exploration companies.

Earnings per share should grow rapidly during 2008-09 as low dayrate contracts roll over to dramatically higher long-term contracts.

Almost all of Transoceans rigs are contracted through 2008 and there is little availibility in 2009.