Transocean's Latest Numbers Could Be Misleading

For oil and gas companies, there's nothing more important than reserves, rigs, submersibles, and refineries. However, to be truly valuable, these assets must be capable of generating profitable returns.

Value for money
It makes little sense for an offshore drilling contractor to own a lot of rigs, but not be able to utilize them to full capacity. In short, you have to understand how valuable these rigs, drillships, and submersibles are to the company. Today we'll take a look at Transocean (NYSE: RIG) and see how efficiently the company uses its resources.

To help evaluate this, we can look at some important metrics:

• Return on assets, or net income divided by total assets, indicates how efficiently the company generates profits for every dollar of assets it owns. A higher value indicates that the assets are more valuable. The metric is pretty useful when used as a comparative measure against peers and the industry in general. The average ROA for Transocean's peer group in the oil-field services industry is about 6.6%.
• Fixed-asset turnover ratio, or revenues divided by total fixed assets, indicates how efficiently the company's refineries are generating revenues. The higher the turnover rate, the better. For these companies, a value above 2.7 times looks pretty good.
• Total Enterprise Value/TTM EBITDA shows how expensive the company looks when compared to its trailing-12-month earnings before interest, tax, depreciation, and amortization.

This is how Transocean stacks up against two of its peers:

Source: S&P Capital IQ; TTM = trailing 12 months.

Transocean doesn't seem to generate the best returns compared to these peers. The company's ROA and fixed-asset turnover are below the industry average, as well.

But as I see it, the company simply has yet to recover fully from the 2010 Gulf of Mexico oil spill, which is why I don't think these numbers reflect the true picture. In 2011, Transocean recorded an impairment of $5.2 billion, which led to a net loss of $5.7 billion. Keep in mind that impairment losses are simply accounting entries without any real outflow of cash involved.

Obviously, ROA took a beating due to this. However, offshore drilling is moving further and further away from shallow water, as fellow Fool Travis Hoium points out. Transocean's deepwater drillships should see increased demand, and with higher crude oil prices, the rigs should command higher dayrates. However, investors should watch out for SeaDrill and Halliburton, which could play a major role in an industry where competition is cutthroat. SeaDrill has a fleet of new rigs and drillships, with more than 50% of them contracted till beyond 2015. Halliburton, on the other hand, is an established hand in the game offering diverse services.

Given the opportunity and Transocean's skill in deepwater drilling, its assets look undervalued. The company also pays a dividend and currently yields almost 6%.This might be an excellent opportunity to grab a few shares. If you'd rather stay on the sidelines and watch the company for a while before jumping in, add it to your personalized watchlist. It's free.