Transocean Ltd. (RIG) Annual Valuation – 2014

Transocean_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Defensive Companies.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Transocean Ltd. (RIG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Transocean Ltd. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. The Company operates in two segments: contract drilling services and drilling management services. Contract drilling services, the Company’s primary business, involves contracting its mobile offshore drilling fleet, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. Its drilling management services segment provides oil and gas drilling management services on either a dayrate basis or a completed-project, fixed-price (or turnkey) basis, as well as drilling engineering and drilling project management services. As of February 14, 2012, it owned or had partial ownership interests in and operated 134 mobile offshore drilling units. On October 4, 2011, the Company acquired Aker Drilling ASA (Aker Drilling). In February 2011, it sold the subsidiary that owns the High-Specification Jackup Trident 20.

RIG Chart

RIG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $41.60
MG Value $0.00
MG Opinion Overvalued
Value Based on 3% Growth $4.87
Value Based on 0% Growth $2.86
Market Implied Growth Rate 57.65%
Net Current Asset Value (NCAV) -$25.12
PEmg 123.81
Current Ratio 2.04
PB Ratio 0.88

Balance Sheet – 3/31/2014

Current Assets $5,633,000,000
Current Liabilities $2,763,000,000
Total Debt $10,308,000,000
Total Assets $31,897,000,000
Intangible Assets $2,987,000,000
Total Liabilities $14,726,000,000
Outstanding Shares 361,980,000

Earnings Per Share

2014 (estimate) $3.31
2013 $3.87
2012 $2.27
2011 -$18.40
2010 $3.00
2009 $9.91
2008 $13.09
2007 $14.10
2006 $4.26
2005 $2.13
2004 $0.47

Earnings Per Share – ModernGraham

2014 (estimate) $0.34
2013 -$0.72
2012 -$1.36
2011 -$0.67
2010 $8.42
2009 $10.32

Dividend History

RIG Dividend Chart

RIG Dividend data by YCharts


Transocean is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor has major concerns with the lack of earnings stability or growth over the last ten years, the lack of a strong dividend record, and the high PEmg ratio.  The Enterprising Investor has concerns with the high level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through the ModernGraham Valuation Index.  As for a valuation, the company appears significantly overvalued after seeing a drop in its EPSmg (normalized earnings from $8.42 in 2010 to an estimated $0.34 for 2014.  This demonstrated lack of growth does not support the market’s implied estimate of 57.65% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Transocean Ltd. (RIG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Transocean Ltd. (RIG) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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