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Oil & Gas Stocks

Transocean Limited Annual Valuation – 2015 $RIG

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 Most Undervalued Companies for the Defensive Investor – April 2015.  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 Limited (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.

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 - FAIL
  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 - PASS
  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:

Balance Sheet – March 2015

Current Assets $5,843,000,000
Current Liabilities $3,173,000,000
Total Debt $8,996,000,000
Total Assets $27,105,000,000
Intangible Assets $0
Total Liabilities $13,904,000,000
Outstanding Shares 363,000,000

Earnings Per Share

2015 (estimate) $1.21
2014 -$5.29
2013 $3.87
2012 -$0.62
2011 -$17.88
2010 $2.88
2009 $9.84
2008 $12.53
2007 $14.14
2006 $6.10
2005 $3.03

Earnings Per Share – ModernGraham

2015 (estimate) -$1.51
2014 -$3.05
2013 -$1.41
2012 -$2.25
2011 -$0.61
2010 $8.38

Dividend History

Conclusion:

Transocean Limited is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability or growth over the last ten years, and the short dividend history.  The Enterprising Investor is concerned with the level of debt relative to the net current assets and the lack of earnings growth or stability over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued due to its negative EPSmg (normalized earnings).  One of the primary goals of investing and good business is to not lose money, and that is what this company is currently doing.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well below the 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 Limited (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.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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