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Just Ask Icahn: Transocean Undervalued and Cruising

So, 26% of Transocean's gains occurred over the past month. There is some validity in what Syed is saying; a pullback would not be a surprise. Still, given the broad recovery that this entire sector has started to experience, it seems short-sighted to discount Transocean's improved fundamentals while outweighing technical fears.

Let's not forget this is a company that recently beat EPS estimates by 30 cents a share. Transocean is highly profitable, and management is running a highly efficient operation given that total fleet rig utilization was up 3% year-over-year. It's true that Transocean's costs will likely rise as the company has an aging fleet of rigs, something rivals, including National Oilwell Varco, also face.

It's not as if the current fleet, which posted a 4% increase in average daily revenue, is suddenly falling apart. Long-term capital investments are the lifeblood of this sector. The good news is that Transocean is not lacking the capital needed to fund these improvements. With a backlog that now stands at roughly $30 billion, there's ample supply of cash flow coming in to allow management to not only run the business, but continue its strong dividend paying policy, which currently yields 4.70%.

While Transocean is far from a flawless company, all of the signs are pointing upward. That's not to say there are no longer risks here. But with a noticeable increase in global energy spending, I do see this stock as undervalued by at least 25% relative to its long-term potential.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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