NEW YORK (TheStreet) -- For the past eight months, anyone investing in offshore drilling giant Transocean (RIG) has drowned in losses. The stock has fallen more than 30% since shares hit a high of $55.74 in November.
Shares, at around $39, are down more than 21% on the year to date, trailing the energy sector's 14% gain. Transocean reports second-quarter earnings Wednesday.
But don't worry. Given Transocean's status as the world's largest offshore driller and its dominant position in the ultra-deepwater float industry, now is the time to buy. The market has gotten this story wrong.
With the stock trading at just nine times trailing earnings, these shares are cheap.
Rivals Cameron International (CAM) and National Oilwell Varco (NOV) are trading at multiples of 25 and 14, respectively. Transocean is being discounted by 11 points below the industry average P/E of 20. And even based on next year's estimates, Transocean's P/E is only at 11.
At some point the market will realize its mistake. With the company's strong backlog and ample cash supply, Transocean is poised to rebound. With a noticeable increase in global energy spending, the stock will be a beneficiary of that demand, reaching $45 to $48 per share in the next 12 to 18 months. Here's why.
First, contrary to popular opinion, the company's fleet of rigs is not the Achilles heel it is perceived to be. The company has roughly 92 units that are either in operation or are under construction. Within this fleet, Transocean owns close to 30 floaters.
The floaters are seeing strong demand, particularly the high-spec floaters, which is now contributing close to 75% of total revenue. Only Seadrill (SDRL) comes close with 21 floaters.
Secondly, Transocean is no longer dealing with excessive downtime issues. In the most recent quarter, total average day rates jumped 14% year over year. This meaningful increase demonstrates how management's efficiency improvements are beginning to work. The company is also focusing on value creation.
To that end, management is looking to divest its drilling services segment by the end of this year, which will help Transocean achieve a higher-yielding asset base. This combined with management's plan to spin-off a portion of its mid-water floaters, will allow the company to decrease its costs.
These cost savings will give management the flexibility it needs to redeploy capital and invest in areas like high-margin ultra-deepwater rigs, especially since these rigs yield the highest day rates.
Finally, Transocean is not a broken company, as is presumed by the stock price. I'm not suggesting this company is flawless. But at some point these initiatives will be reflected in the bottom line, and investors will kick themselves for not having jumped on this opportunity when it was presented.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates TRANSOCEAN LTD as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate TRANSOCEAN LTD (RIG) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, revenue growth, attractive valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- TRANSOCEAN LTD has improved earnings per share by 42.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, TRANSOCEAN LTD increased its bottom line by earning $3.87 versus $2.24 in the prior year. This year, the market expects an improvement in earnings ($4.21 versus $3.87).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Energy Equipment & Services industry. The net income increased by 42.0% when compared to the same quarter one year prior, rising from $321.00 million to $456.00 million.
- RIG's revenue growth trails the industry average of 21.4%. Since the same quarter one year prior, revenues slightly increased by 7.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
- 45.75% is the gross profit margin for TRANSOCEAN LTD which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 19.49% is above that of the industry average.
- You can view the full analysis from the report here: RIG Ratings Report