Is It Safe? Idle Rigs Could Hurt Transocean

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Transocean's(RIG Quote) cheap shares and dominance in offshore oil drilling make it seem like a sure bet. But its investors might have to wait at least a year for any significant gains.

The Switzerland-based company is the world's biggest offshore driller with 136 rigs, including 34 that can run in water deeper than 4,500 feet. With demand for petroleum picking up and the price of crude oil edging higher, that seems like a favorable position.

However, Transocean rigs might sit idle as oil and gas producers cut capital spending this year. Overcapacity could stifle earnings at least though next year and potentially through 2011, according to at least one analyst. That means Transocean will collect less lease fees from customers that use its equipment, making profits elusive.

Judson E. Bailey, a managing director at Jefferies & Co.(JEF Quote), expects the firm's net income to decline through 2011. He says the deepwater drilling industry might be "modestly oversupplied by late 2010 to 2011, thus facilitating a sharper and more prolonged dayrate and earnings downturn." He downgraded the company to "hold" from "buy" in a recent report.

Transocean, which controls 38% of the deepwater drilling market, has a history of wide stock-price swings. After falling below $20 in 2003, the stock climbed to $160 last year. When crude prices collapsed to less than $40 after approaching $150 last July, the company's shares imploded. They've since recovered, rising 61% this year as the Morgan Stanley Oil Service Index climbed 43%.