Transocean

Transocean ( RIG) is Morningstar's most notable takeover investment idea for its size, notoriety, upside - and let's face it - its risk. The world's leading offshore rig maker has seen its shares plummet in recent years as a result of potential litigation related to the blowout of BP's ( BP) Macondo oil well, in addition to a slowing of deepwater rig rentals after a drilling moratorium in the U.S. In the third quarter, the firm reported an unexpected quarterly loss of $71 million on higher than expected expense and lower than expected revenue.

However, Morningstar expects that the rig maker may see takeover interest even as it underperforms rig making peers. "I think there are a few candidates here. First, and most obviously, is Seadrill," writes Stephen Ellis of Morningstar. In Aug. 2011, Transocean spent $1.46 billion in cash to buy Norway's Aker Drilling, beating out Seadrill ( SDRL) in a deal that Morningstar calls "ill-timed."

"An all-stock deal could work, given Seadrill's premium priced stock," adds Ellis, citing the company's head John Fredriksen and his propensity to cut opportunistic deals. "Fredriksen could easily spin off Transocean's older, less capable assets, and retain the valuable deepwater and ultra-deepwater rigs if he wishes," adds Ellis.

Priced at a discount to its net asset value, Ellis sees that the firm could also be a target to a competitor like Noble Energy ( NBL) or a dark horse like Ensco Plc ( ESV) in an all-stock deal. Nevertheless, Morningstar highlights the company as a strong investment idea because of its beaten down stock price. Transocean shares fell over 40% in 2011.

Still, Transocean faces significant 2012 headwinds, including an unsettled $40 billion April lawsuit between it and BP on Macondo spill liability, a series of disappointing earnings and the unexpected January retirement of its CFO Ricardo H. Rosa.

Morningstar gives Transocean a five star rating and a fair value of $67 a share, a near 50% premium to current prices. Analysts expect Transocean to earn 26 cents a share in the fourth quarter, according to Zacks. Transocean warrants a $59.01 a share price target and is expected to earn $10.4 billion and $1.06 billion in 2012 sales and profits respectively, according to analysts polled by Bloomberg. For more on Transocean shares see, 15 stocks to ride the energy boom of the next decade.

Within the oilfield services sector, Morningstar highlights potential tie-ups between Halliburton ( HAL) and Weatherford ( WFT), in addition to a merger between land drillers Nabors ( NBR) and Patterson ( PTEN), with Nabors being the likely acquirer because of its size. Morningstar also notes that Diamond Offshore ( DO) may look at acquisitions to expand its slow progressing deepwater presence.

Other energy takeover targets include Range Resources ( RRC), Ultra Petroleum ( UPL), SandRidge Energy ( SD) and Whiting Petroleum ( WLL) according to Morningstar because of their low valuations and operations in unconventional energy plays. Chevron ( CVX) and ExxonMobil ( XOM) have been particularly acquisitive in the shale space, notes Morningstar, with both companies using their large cash balances to buy up unconventional drillers in recent years.

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