Demand for oil is so strong -- and doesn't look to be disappearing anytime soon -- that the industry is struggling to keep up. And with oil prices sitting at record highs, major energy companies like ConocoPhillips
The shares haven't exactly been laggards, rising nearly 80% in the last year, far outpacing the 35% gain posted by the Philadelphia Oil Service Sector Index. Still, the company is attractively valued, trading at 10.3 times trailing earnings versus the industry average of 16.8 times. Analysts' growth expectations are pegged at 36.67%, and I think further upside potential remains as Transocean should continue to benefit from increased exploration and production (E&P) spending by oil companies, improved rig utilization rates, and higher dayrates. The company also provides investors with downside protection in the form of its $32 billion backlog.
The rig lineup
Transocean's total offshore fleet of 138 drilling units is more than twice as big as that of Pride International
Exploration and production budget increases
According to a recent Lehman Brothers survey, oil and gas companies are expected to increase E&P spending by 11% in 2008, to an estimated $369 billion, the sixth consecutive year of double-digit growth. I view this estimate as conservative, because oil companies are basing their 2008 budgets on an average crude price of $68 per barrel, a significant discount to current prices hovering well above $100 per barrel.
In any case, Transocean should benefit disproportionately from this spending, since many of the new oil and gas finds -- such as Petrobras'
Strong utilization rates and increasing dayrates
The combination of strong demand for and tight supply constraints on offshore drilling rigs enabled Transocean to post average rig utilization rates of 90% for the year ended Dec. 31, 2007, an increase over the 84% average rate reported in 2006. Dayrates came in at an average $224,000, a 30.4% gain over the $171,700 average last year.
I expect both utilization and dayrates to continue to remain strong, driven by the ultra-deepwater segment of the business, where analysts are predicting climbing dayrates. Six of the eight deepwater platforms that Transocean currently has under construction have already snagged contracts.
The significant demand for Transocean's services give the company leverage to increase pricing when rigs come off contract. With plenty of backlog already lined up, even an unexpected temporary lull in demand wouldn't damage near-term earnings.
This is definitely one stock investors should drill into and consider pumping up their portfolios with its shares.