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Hold Off on Transocean for Now

RIG offers little with a lawsuit on its plate

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It doesn’t look pleasant for the rest of 2012 or even into next year. Growth in oil demand will slow in 2013, according to OPEC, and a decent supply cushion portends flat prices for some time to come.

I don’t see much of a turnaround in the energy market, and thus I don’t see a significant turnaround for RIG on the demand side anytime soon.

The Bullish Cash for TransOcean

Of course, if litigation is ended favorable and demand picks up, then Transocean will be sitting pretty. With a projection of $5.13 for its fiscal 2013 EPS, that gives the driller forward P/E of just 8.2. Not bad if it stands.

And longer term, a $16 billion market cap makes Transocean one of the most well-heeled drillers in the world. RIG is a great long-term play on the big-picture idea that the world’s easy-to-extract onshore oil is drained and deepwater finds will be increasingly important. Also, the political opposition to offshore oil has been steadily declining since Deepwater Horizon fervor, and a few more years of safe operation could mean the will to access more coastal U.S. fields for big profits.

And despite a soft energy market, RIG near-term is seeing strong orders. New contracts for just the two-month period between February and April totaled $834 million alone.

Then there’s the chance of the dividend returning down the road. This obviously will not be until the legal troubles are in the rearview mirror, but could be just a year or two away if things go well.

Last but not least: While there hasn’t been a lot of analyst activity in a while, the most recent moves earlier in 2012 were all upgrades with significantly higher targets. Of 22 analysts covering this stock according to Thomson/First Call, the mean price target is $63.39 and the median target is $65 — 30% to 40% up from here.

So if you want to stick your neck on the legal front and bank on favorable settlements or if you like the long-term prospect of offshore oil, RIG is a good play. But I have to reiterate that the short-term risks are very clear and very significant — so the prudent thing might be to sit and watch if you don’t own shares.

Do you have a stock that’s on your mind? Drop me a line at and I’ll take a look at it.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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