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Transocean: Room for Shares to Run

Transocean may be the biggest rally stock among the oil spill-linked companies, and it's rallying ahead of its Wednesday after-hours earnings report.

NEW YORK (

TheStreet

) -- Is Transocean on its way to $70? That's the opinion of several Street analysts ahead of the Transocean earnings report expected after-hours on Wednesday.

In the least, Transocean shares are rising on Wednesday morning, up as much as 8%, one of the biggest gains in the energy sector, and reaching its average daily trading volume of nine million shares early in the day.

Transocean led the energy-sector rally on Monday, too, and this week shares of the oil rig operator are up roughly $8, to a share price above $54.

The recent gains for Transocean aren't an oil spill milestone. Transocean shares have traded as high as $55 in recent weeks. Still, the big rally ahead of its earnings is helping arguments that Transocean has the most room to run as the oil spill becomes less of an overhang on the stock.

There's been a spate of earnings from oil spill-linked companies this week, all trailing the $17 billion loss posted by BP on July 27.

BP finally hit the $40 threshold on Tuesday, a share price the oil company hadn't reached since May. The $40 mark for BP shares came as BP announced what it calls a "significant milestone" in the oil spill response, with its static kill operation taking control of well pressure. The White House also announced on Wednesday that roughly 74% of oil leaked by the BP well into the Gulf of Mexico has been cleaned up.

>>BP Stock Hits $40 Threshold

David Smith, an analyst at Johnson & Rice, said that Transocean will benefit the most of the oil spill stocks when the relief well finally provides the permanent seal on the well. It could be argued that the Transocean relief well rally was starting early with the success of the static kill.

Anadarko Petroleum

(APC) - Get Anadarko Petroleum Corporation Report

announced its earnings after the market close on Tuesday and was also rallying after guiding production up for the full year.

>>Anadarko Guides Higher, Shares Rise

Cameron International

(CAM)

, the manufacturer of the blowout preventer for the BP Macondo well, reported early on Wednesday morning. Cameron raised its full-year guidance, but its shares did not receive much of a pop in Wednesday trading. Analysts say the Cameron story is less about the earnings number, with its order backlog the leading indicator.

>>Cameron Expects Higher Earnings

The Street is expecting earnings of $1.68 from Transocean on revenue of $2.56 billion.

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In any event, the more important Transocean number for investors may be conviction from analysts that the oil rig operator's shares are worth at least $70.

Phil Weiss of Argus Research and Collin Gerry of Raymond James both hold this bullish opinion on Transocean, which had traded at $92 before the oil spill wiped out half of its market value.

"Transocean will do fine, and they are dirt cheap," said Argus Research's Weiss. The analyst said it basically comes down to an investor's view of the ongoing legal overhang from the oil spill. If the market has confidence that Transocean won't have to pay out large sums of money not covered by insurance, then Transocean shares will rally the most among oil spill stocks, Weiss argues.

Raymond James analyst Collin Gerry thinks that Transocean and Cameron are both buys, even though Transocean is still in the crosshairs, and headline risk hasn't been eliminated.

Given the bullishness from the Street on Transocean shares, why aren't shares worth just as much as they had been before the oil spill, at $92? Weiss at Argus Research said that's a good question, though it's better to go with the $70 bullish assumption based on the value of Transocean's backlog alone.

It comes down to day rates for the riggers, and Gerry thinks he is being conservative in hit modeling of day rates in the new deepwater world, with a range between $200,000 to $400,000. "Most renegotiations we've seen so far have been OK," Gerry said. A long-term bullish view on crude oil -- which surpassed $80 this week -- will push day rates back up to the $500,000 level, the analyst argues. It's an outlook that would take Transocean right back to the $90 to $100 range at which it traded before the oil spill.

>>Oil Holds Gains, as Markets Falter

Even short of that scenario, the Raymond James analyst thinks that Transocean will generate enough cash flow to deserve a value of $70. Gerry also thinks that it comes down to the liability versus insurance issue, with upside to the $70 Transocean share predicated on liability not in excess of insurance.

-- Written by Eric Rosenbaum from New York.

RELATED STORIES:

>>BP Stock Hits $40 Threshold

>>Anadarko Guides Higher, Shares Rise

>>Oil Holds Gains, as Markets Falter

>>Baker-Hughes Disappoints, Outlook Mixed

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