RIG Preview: How's Overall Demand?

Transocean (RIG - commentary - Cramer's Take) is slated to report earnings before the market opens Wednesday with a conference call scheduled for 10:00 a.m. EST. Current projections call for the company to produce EPS of $3.49 on total sales of $3.14 billion.

Recently, the stock has been in a steep descent, as the price of oil has been cut in half. No doubt some of the selling pressure has come from momentum investors running for the doors and perhaps some forced selling from liquidations, causing investors to sell everything with regard to valuation.

Earnings predictability for Transocean is normally transparent, as the company is very forthcoming on its rig counts, new builds and dayrates projected for each rig. Therefore, I wouldn't expect much of a surprise from management. What might be telling, however, is what the company's outlook on overall demand looks like. Is it weakening slightly, or does management not see any change at all yet?

Moreover, the worst-case scenario for Transocean is one in which larger-term contracts somehow get broken or renegotiated down to lower prices. While I don't think it's a huge concern right now, we will need a recovery in the global markets for this scenario to be taken off the table.

At about 5 times to 6 times forward earnings, the stock appears fairly attractive. Earnings will always correlate with the health of Transocean's customer base, which will be impacted by the price of oil. Given the business's deepwater focus, I like it vs. some of the company's competitors.

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At the time of publication, Thomas was long Transocean, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm's senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor's degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.