Rising Star Buy: Once More With Transocean

This article is part of our Rising Star Portfolios series.

Deepwater oil driller Transocean (NYSE: RIG  ) was the very first purchase I made in my Messed-Up Expectations portfolio. The thesis was pretty simple: Low expectations for growth were priced in because drilling in the Gulf of Mexico was uncertain after the major oil spill last year and Transocean, along with BP (NYSE: BP  ) , was tagged in the public's mind as being responsible. Add in a tougher well certification process and uncertainty about financial liability from the spill, and things looked pretty bleak for Transocean.

Yet it has weathered the storm pretty well. First, during its last earnings conference call, management pointed out that all the blow-out preventers (BOPs -- a contributor to the Macondo well disaster) had been recertified on its ultra-deepwater rigs and that activity was picking up in the Gulf of Mexico.

Second, it is seeing increased utilization rates for its ultra-deepwater rigs, as shown in the table below.

Rig Type	Utilization / Avg. Daily Revenue, Sept. 30, 2010	Utilization / Avg. Daily Revenue, Dec. 31, 2010	Utilization / Avg. Daily Revenue, March 31, 2011	Utilization / Avg. Daily Revenue, June 30, 2011
Ultra-deepwater	77% / $422,800	76% / $435,900	77% / $467,700	80% / $516,600
Harsh environment	93% / $414,100	92% / $366,800	83% / $402,400	93% / $430,100
Midwater	73% / $328,400	68% / $298,500	60% / $313,000	54% / $333,000
High-specification jackups	61% / $138,100	38% / $162,600	40% / $106,200	56% / $110,300
Standard jackups	52% / $113,200	46% / $110,600	43% / $109,200	43% / $111,700
Total fleet	64% / $271,200	58% / $276,600	55% / $292,600	55% / $312,100

Source: Company 10-K and 10-Q filings for the 3-month periods ending on given dates.

As you can see, not all rig classes have improving utilization rates, such as the standard jackups, but management said in the call that the demand is picking up for these as well, leading to comments about reactivating some of the idled units.

More importantly, however, the average daily revenue for the various rig types and for the fleet as a whole is improving. With increased demand around the globe, that trend should continue.

Finally, demand for drilling rigs is also increasing, thanks to Petrobras' (NYSE: PBR  ) moves toward drilling in the fields off the coast of Brazil, increased activity off the coast of West Africa, and ExxonMobil's (NYSE: XOM  ) recent find of a new oil field in the Gulf of Mexico.

One last point in favor of Transocean: It has introduced a quarterly dividend that the board of directors believes is sustainable going forward. As of last night's price, the yield was 5.7%.

The risks with this company remain, particularly the one for financial liability from the oil spill last year. That, however, will take several years to work out. The price today is less than it was when I first purchased shares for the MUE port and the company's situation has arguably improved. Tomorrow, I'll increase the portfolio's position in Transocean.

After you add Transocean to My Watchlist, come discuss the decision on my Messed-Up Expectations discussion board, or follow me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).