Ogling Transocean

Once again it's time to check in on Transocean (NYSE: RIG  ) , the doyen of the deepwater. As with bride-to-be GlobalSantaFe (NYSE: GSF  ) , Transocean's dramatic results did not disappoint.

Revenues for the quarter were up 7% sequentially, even though utilization eased a smidge. Results left last year's figures in the dust, thanks to 50% higher dayrates. Operating income nearly doubled, and net income more than tripled, due to benefits from Hercules Offshore's (NYSE: HERO  ) buyout of TODCO, along with some other non-operating goodies.

High dayrates are great and all, but last quarter's rates, or even today's rates, don't tell you a lot about tomorrow. Rates go up, until they don't. That's why it's critical to keep an eye on contract backlog. Let's look at the growth in backlog over the past few quarters.

Q4 2006

$20.8 billion

Q1 2007

$21 billion

Q2 2007

$21.4 billion

Q3 2007

$22.9 billion

Data provided by Transocean.

Do you see what I see? Backlog isn't just growing -- it's accelerating. The end of the second quarter saw backlog up $400 million. This quarter, jackup backlog alone was jacked up by that much. Yes, shallow, unloved jackups -- the ones that make Wall Streeters squirm. Actually, the undulating jackup market has also made Transocean's CEO uneasy for two years running. It's nice to see him readily admit he's been wrong.

Transocean has done a bang-up job on backlog, but is the stock a buy? Maybe, but you have to wonder what insight you have at this point that other investors are missing. Back in May, I noted a fair amount of market skepticism, but that was around $90 a share. Now, everyone's transfixed with Transocean.

If you seek to invest like a business owner, rather than that guy who put a rattlesnake in his mouth, I happen to think that margin mavens Ensco International (NYSE: ESV  ) and Noble (NYSE: NE  ) are most deserving of your drilling dollars.


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  • Report this Comment On November 05, 2007, at 11:00 AM, wcaseym wrote:

    Backlog, shmacklog! What you need to understand right now about RIG is this: ... RIG will be the surviving legal entity - post deal with GSF. Current RIG shareholders will receive $33.03 in cash and 0.6996 shares of the "new" RIG for each current RIG share they own. GSF shareholders will receive $22.46 in cash and 0.4757 shares of the "new" RIG for each current GSF share. The "new" RIG will have 318 million outstanding shares (322 million on a fully diluted basis). "New" RIG revenue backlog is estimated at ~$33 billion (... management claims this will equal to ~$16 billion in free cash flow. In order to monetize this amount, the plan is a $15 billion recapitalization - his makes sense, ... although cash payouts will be a "special dividend in conjunction with a reverse stock split", the reality is this represents a massive share repurchase.

    All therefore is left for us fools to do is this: we need to evalutate "new" RIG on it's own merit, ... including its new debt. Will "new" RIG shares reflect full value of a new company? Dunno, ... prbably not at the start - it will depend on market setiment at the time "new" issue starts trading. fwiw.

    C., ... into "rig-jig" since very long time ago![... but don't own any at this junction - see my CAPS for my treading pattern]

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