Transocean's shares jumped $8.34, ending at $155.54 after Bloomberg News reported that Petroleo Brasileiro (NYSE: PBR), Brasil's state-controlled oil company, leased about 80% percent of the world's deepest-drilling offshore rigs to explore prospects. That included the Western Hemisphere's biggest discovery in decades, the Tupi field. Further, the activity of Petroleo, also known as Petrobras, is forcing up day-rates for oil rigs. PBR also closed higher Thursday, up $2.00 to $68.27.
Further, Petrobras is in talks with Transocean to extend leases as much as three years ahead of expiration, Robert Long, chief executive officer for the Houston-based RIG, told Bloomberg News. Also, Petrobras plans to start pumping oil from Tupi in Q1 2009. Tupi is the largest oil find in North America since the 1976 Cantarelli field discovery in the Gulf of Mexico.
Stock Analysis: Petrobras' current and future rig demand is bullish for Transocean, first reviewed in this space on November 7, 2007. Transocean is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 1 year should be rewarded from RIG's shares.
The world is not only running out of oil, it is also running out of oil specialists. A lot of the experience oil engineers had retired, and some companies had acquired smaller oil companies just to get their oil engineers to join them. Since this is the case, oil price of $126 is no where near the peak. I'm forecasting $250 oil in the next 2 years.
High oil price simply means that demand for oil rigs will rise. Transocean Inc has raised the day rate for oil rigs from USD500,000/day to USD600,000/day. So this means, the higher the oil price, the more money Transocean will make.
Transocean currently trading at PE of 10x, valuation is too cheap. This implies to me that market refuses to believe that oil price is going to stay this high, BUT market is going to change its view when they realised that oil price is not going to fall below $100 anymore. At that time market will price a high valuation for Transocean. I would think that PE of 25x is more reasonable. For PE of 10x to rise to 25x, share price will have to rise at least 100%. Hence this stock offer tremendous upside.
If you believe oil price is going to go higher in the long run, then Transocean is MUST HAVE in your portfolio.
The First Call mean rating for RIG is: Buy [36 firms]. Mean 2008 target: $168.00 [high: $197, low: $118].
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