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transocean analysis 2014

Transocean Ltd (RIG) Analysis 2014

Here’s a Transocean Ltd (RIG) Analysis for 2014. RIG came to my attention after a follower on Stocktwits mentioned it as a potential value investment opportunity. At a glance, RIG is trading to a discount to other publicly traded oil and gas exploration companies. So I thought it was worth further analysis:

Fundamental Valuation Overview:

RIG caught my attention and warranted further analysis because of the conservative fundamental valuation the company receives. Compared to a number of peers RIG appears cheaply valued. This is seen in the low PEG ratio, the sub-10 PE and the share price hovering below book value. While RIG has modest debt levels the current ratio near 2 implies liquidity is not a pertinent threat. And really…

It’s not often that you see major large cap companies trading at a discount to both current and future earnings, as well as a discount to assets (book value). To sweeten the deal, RIG also pays a 5% dividend.  Arguably the oil exposure is also a bit of a hedge against inflation in the coming year or two. And while all of this is what value investors love to see, there must be a reason for this cheap valuation, right?

RIG has been dead money for almost 2 years now. But it looks like some of these problems might be in the rear view mirror, so let’s dive a little deeper…

RIG Growth Narrative Analysis:

RIG has under-performed the market the last couple of years.  Margins have come under pressure due to under-utilization and lower day rates. While global growth remains slow, it’s reasonable to expect oil demand to slowly increase over the coming years. New deep water discoveries in the Gulf of Mexico also bode well for the future of RIG.

And while new exploration projects obviously provide future revenue potential, there are also a lot of new rigs scheduled to come on line in the coming quarters. Investors will want to be wary that oil prices and margins could remain under pressure. Luckily, RIG does have a premium positioning in the market…

For example, RIG has a backlog of orders, and a lot of them are in the ultra-deep segment where the company is already at 100% utilization and continuing to invest heavily. It’s nice to see RIG with such a strong grasp on this important segment of the oil discovery market as it infers something of a competitive advantage.

However a final red flag investors will want to be wary of is the shortcomings of management in the past couple of years. While activist investor Carl Icahn has announced a 5%+ stake in RIG, replaced the CEO and got a couple of seats on the board, RIG is still a big ship that will take awhile to turn around. The company has been improving efficiency and looks to be on track. But investors may need a few months of patience before seeing meaningful capital appreciation.

Speaking of patience: When analyzing companies for longer-term investment, it pays to look at how the price action relates to the fundamentals. So let’s take a look at RIG stock charts on a few different time frames..,

RIG Technical Analysis Long Term:

RIG Monthly Jan 2014

Click to enlarge this annotated monthly chart of RIG and see the big picture story of price action

RIG Technical Analysis Medium Term:

RIG Monthly Jan 2014

Click to enlarge this weekly chart of RIG to see the controlling technical price pattern

RIG Technical Analysis Short Term:

RIG Daily Chart Jan 2014

Click to enlarge this daily chart of RIG for short term technical analysis.

RIG Analysis Conclusion:

So there you have it. RIG would probably be a safe bet to add to a long term portfolio. I would personally wait for the recent selling to stabilize before dipping a toe. But if you’re in it for the long term this doesn’t seem like a bad price to own some Transocean. While RIG looks tempting management’s ability to deal with oversupply issues or CapEx challenges remain discounted by the market. For those reasons, I think I’ve found another similar idea I like even more. But I’m going to keep that one for premium subscribers.

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