"What's going on with Transocean (NYSE RIG), the owner of the world's biggest fleet of offshore drilling rigs?" asks Richard Moroney, a specialist in blue chip stocks.
In his Dow Theory Forecasts, he explains, "The shares plunged 67% - nearly $100 a share - in 2008, and we can't blame the usual suspects." Here, he explains why he continues to rate thes stock a "Focus List Buy" in his blue chip-focused advisory service.
"Poor operating performance? Wall Street expects 2008 per-share profits of $14.34, up 68%. Shaky future? Transocean is expected to grow per-share earnings 4% in 2009 and 10% annually over the next five years.
"Fundamentals eroding? Not at all. The balance sheet is sturdy and the backlog stout at $41 billion, or three times expected 2009 revenue. Rather, we see two chief contributors to Transocean's steep slide, and neither should jeopardize long-term prospects.
"First, Transocean was dropped from the S&P 500 Index after moving its headquarters to Switzerland. The switch should have no material effect on results.
"However, Wall Street responded with a 23% sell-off in the week after the announcement, in large part because S&P 500 index funds and many institutional investors bailed on the newly foreign company.
"The second reason is more worrisome, but still temporary. The U.S. economy is contracting, and per-barrel oil prices are slumming in the high $30s. In a recession, companies and consumers cut down on energy use, and weakness is already visible in parts of the drilling market.
"However, Transocean should continue to bene?t from high rig lease rates under long-term contracts. Given that most drilling projects last for years, oil companies generally take a long view, and we do not expect a sharp slowdown in deep-water drilling.
"Transocean controls roughly 20% of the offshore-drilling market and operates about one-third of deepwater rigs. As land reserves dwindle, oil companies remain committed to deepwater projects.
"Energy research ?rm ODS-Petrodata projects demand for deepwater rigs will exceed supply in 2009. Transocean has booked 98% of 2009 contract days for its deepest floaters; two-thirds are contracted through 2011.
"Most of the company's 10 new ultra-deepwater rigs go online in the next two years, and all already have long-term contracts.
"One cause for concern is jack-ups, rigs that stand on the ocean floor in shallower waters. Two dozen of the industry's new jack-ups slated for completion this year have no contracts, which could lead to sustained softness in the overall market.
"Jack-ups make up about half of Transocean's fleet, though they contribute a much smaller portion of total revenue. Transocean estimate that most clients can drill profitably with oil around $60 per barrel.
"Transocean's long-term picture remains compelling. Its balance sheet, strong presence in deepwater drilling, and valuation (3.5 times estimated 2009 earnings) makes the stock an attractive rebound pick."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
