I continue my quest for companies that are benefiting from oil exploration in difficult environments -- farther under the ground, deeper under the ocean, and from non-conventional sources like oil sands. Transocean (NYSE:RIG) is one company poised to post profits from deepwater drilling.

Transocean calls itself "the world's largest offshore drilling company," with a fleet of 93 drilling rigs and a focus on deepwater and challenging environments. Those rigs include 32 that are high-specification rigs designed for the toughest projects, along with 24 "floaters," 26 "jack-ups," and 11 other rigs. Earlier this year, the company increased its deepwater focus by completing the sale of TODCO (NYSE:THE), which focuses on shallow-water jack-up rigs and barges.

Petroleum companies hire Transocean to construct oil and natural gas wells. Major customers include BP (NYSE:BP), ChevronTexaco (NYSE:CVX), and Petrobras (NYSE:PBR), representing roughly 10% of annual revenue each. Transocean generates revenue by renting drilling rigs and crews on a daily rate basis, known in the industry as dayrate, with contracts typically lasting from six to 48 months. The other industry metric is utilization, which is simply the total rig days in service compared with the total rig days available.

Both dayrate and utilization have been improving at Transocean. In the second quarter, average dayrates were up to $103,100 from $89,100 a year earlier -- 16%. Dayrates for the company's most advanced deepwater rigs have increased to nearly $300,000 a day: Compare that with the $30,000 a day for a TODCO jack-up rig and one can see the benefit of deepwater focus. Utilization has improved to 79% from 68% a year earlier, also up 16%. These trends look like they will continue, as the demand for deepwater rigs exceeds supply. Due to the complexity of the equipment, the capital cost, and the risk involved, it appears no new supply of high-specification deepwater rigs will enter the market in the near future. At the other end of the business, dayrates for shallow water jack-up rigs could flatten while 40 new rigs enter the market in the coming years.

Due to improving business conditions, Transocean shares have advanced nearly 200% in the last two years. Before putting their money down, investors will need to know if business has room to improve. The market certainly doesn't think Transocean is at the end of the road, with analysts projecting huge earnings increases in 2006 and 2007 and estimates for 2006 generally well above $4 a share. Transocean is already halfway there, with 52% of its capacity booked for 2006. Furthermore, dayrates are still increasing, particularly for the high-specification rigs. Oil companies are sitting on mountains of cash to continue these projects, and oil does not look like it will return to $25 a barrel anytime soon.

Like many success stories, Transocean will probably not show up at the top of the list for value-minded investors. Current prices only look good on a forward price-to-earnings valuation; the current P/E is close to 40, very high indeed for a company working in a capital-intensive, high-risk, politically unstable business. I am personally hoping that if oil prices stop setting records, Mr. Market will offer a discount on Transocean.

Transocean has long passed being a Motley Fool Hidden Gem. With a market cap of $18 billion, it is heavily followed by analysts and institutions. Looking at some additional Hidden Gems criteria, Transocean is hit-and-miss. The company was assembled from a number of businesses, resulting in insider ownership of less than 1%, but management is very experienced. CEO Robert Long and Chief Operating Officer Jean Cahuzac have been in the business since 1976 and 1979, respectively, each coming from different branches that formed Transocean. The balance sheet has improved steadily, but there is no dividend; it was eliminated in 2002 when Transocean lost money at the bottom of the business cycle. It does have a large and growing market opportunity available, and has focused on technically advanced projects, where it has a clear advantage.

Perhaps Transocean cannot be considered a Hidden Gem, but for someone who believes the trend of high oil prices will drive production farther offshore, Transocean deserves a place on your watch list, if not in your portfolio.

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Fool contributor Robert Aronen does not own shares in any company mentioned but is hoping for a back-to-school sale on Transocean.