First look at Transocean (RIG)

Transocean is an offshore drilling company. Its fleet of 135 vessels includes drill ships, semisubmersibles, and jackups, which operate in technically demanding environments such as Brazil, Nigeria, and the North Sea. It contracts primarily with some of the largest global exploration and production companies.

DIVIDEND RECORD – Transocean paid an adjusted $0.03 quarterly dividend from 1993 – 2002.  Then it stopped all dividend payments.  Three quarters ago it started paying a $0.79 quarterly dividend.  It went from a no dividend stock to a high dividend stock instantaneously.

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Dividend: $0.79 quarterly

Dividend yield: 7.9% ($3.16 annual DIV / $39.83 share price)

Dividend payout ratio: 200% ($3.16 / $1.58 2011 adjusted EPS) or 103% ($3.16 / $3.06 eleven year average adjusted EPS)

EARNING POWER – $3.06 eleven year average adjusted earnings @ 320 million shares

(earnings adjusted for changes of capitalization)

                        EPS                   Net inc.             Shares               Adj EPS

2001                 $0.80                $254 M              315 M                $0.79

2002                 ($11.69)            ($3,732 M)        319 M                ($11.66)

2003                 $0.06                $19 M                321 M                $0.06

2004                 $0.47                $152 M              325 M                $0.48

2005                 $2.13                $716 M              339 M                $2.24

2006                 $4.28                $1,385 M           325 M                $4.33

2007                 $14.14              $3,131 M           222 M                $9.78

2008                 $13.09              $4,202 M           321 M                $13.13

2009                 $9.84                $3,181 M           321 M                $9.94

2010                 $2.99                $961 M              320 M                $3.00

2011 E              $1.09                $504 M              320 M                $1.58

———————————————————————————–

2011 Q1            $0.40                $309 M              320 M                $0.97

2011 Q2            $0.53                $154 M              320 M                $0.48

2011 Q3            ($0.19)             ($71 M)             320 M                ($0.22)

2011 Q4            $0.35 E*            $112 M              320 M                $0.35

* Q4 2011 earnings estimates comes from Reuters.com

$3.06 eleven year average adjusted earnings @ 320 million shares

Consider contrarian buying below $24.48 (8 times average adjusted EPS)

Consider value buying below $36.72 (12 times average adjusted EPS)

Transocean is currently trading at 13 times average adjusted EPS

Consider speculative selling above $61.20 (20 times average adjusted EPS)

BALANCE SHEET – Thirty-nine percent of Transocean assets is comprised of goodwill.  Why?  I don’t know yet.  The price to book value ratio would rise to about 1.0 if we exclude the $8.1 billion in goodwill.

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Book value per share: $65.10

Price to book value per share ratio: 0.61 this is good ($39.83 price / $65.10 BV per share)

Current ratio: 1.54 (over 2.0 is good)

Quick ratio: 0.77 (over 1.0 is good)

Debt to equity ratio: 0.71

CONCLUSION – Transocean is currently a high dividend stock, but I’m not convinced that it has the earning power to cover the current dividend for the next few years.  The company is currently trading at 13 times average adjusted earnings, but its earning power is highly variable.  A deeper analysis is necessary to determine why there is so much volatility in Transocean’s earning power.  Other companies in this sector do not have the same volatility in earning power.  RIG’s balance sheet is okay right now, but without more earnings it will deteriorate.

I would wait buy until the dividend situation stabilizes and the price falls closer to contrarian territory in the mid-20’s.  China’s looming recession will lower demand for oil at the current price.  That’s not good for Transocean.

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DISCLOSURE – I don’t own Transocean (RIG).

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Published in: on December 21, 2011 at 1:30 pm  Leave a Comment  

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