Seeking Alpha: Fixing Transocean Isn't Going To Be Easy

It's tough enough to operate in a deeply cyclical industry, but when management makes a series of strategic blunders that leaves the company in an noncompetitive position, you get the situation Transocean (NYSE:RIG) is facing today. By refusing to build rigs without contract coverage and prioritizing scale above all else, the company finds itself with a large, outdated, and difficult-to-market fleet that has sizable day-to-day maintenance costs, whether the rigs work or not. Making matters worse, the drillers seem to be looking for any twitch in oil prices as an excuse to hold off on scrapping idle rigs.

Unless there is a dramatic increase in oil prices before year-end or a sustained above-average level of scrapping, the rig market may not come back into balance for two or three years (if not longer). Transocean is probably undervalued as a going concern, and I believe the new CEO's pedigree speaks well to the likelihood of operating improvements, but the company is going to burn through a lot of liquidity, and it's likely going to be hard road for a number of years.

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Fixing Transocean Isn't Going To Be Easy

Seeking Alpha: Ship Finance Needs To Skillfully Redeploy Capital

I continue to believe that the management team at Ship Finance (NYSE:SFL) is high quality and savvy, but they do not have the luxury of standing pat with the hand they're playing. The cash sweeps from the company's renegotiated charter agreements with Frontline (NYSE:FRO) have chipped in solid cash flow and give the company exposure to higher tanker rates in 2015, but those sweeps end after this year and front-loaded drilling contracts will reduce the cash to be reaped from the drilling rig assets.

On a positive note, the company has over $200 million that it can deploy into the vessel market and the company's comparative "platform neutrality" means that management can look for value in tankers, containerships, dry bulk, or drilling rigs as the market dynamics dictate. What's more, the shipping industry is still seeing a lack of high-quality (and affordable) capital, which should work in the company's favor.

Today's valuation is arguably fair if you do not believe that Ship Finance's management can successfully redeploy that capital into vessels/charters that will earn an attractive risk-adjusted return. Historically that has not been a good bet to make and while I can appreciate the appeal of other ideas in shipping like Euronav (NYSE:EURN) and Costamare (NYSE:CMRE), I think Ship Finance is undervalued and offers an attractive yield for those investors who prefer to generate their returns from dividends versus capital appreciation.

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Ship Finance Needs To Skillfully Redeploy Capital

Seeking Alpha: A Rising Tide Of Sentiment Has Lifted Ship Finance

My decision to call Ship Finance (SFL) a Top Idea back on September 19, 2013 wasn't a particularly popular one, but the shares of this large marine vessel leasing company have risen almost 25% since then, while paying a healthy dividend along the way. I'll call that a short-term victory, particularly as Ship Finance has performed just as well or better than a lot of the vessel operators, including Nordic American Tankers (NAT), Costamare (CMRE), and Navios Maritime Partners (NMM).

There seems to be more optimism now about tanker and vessel rates than there has been in some time. Ship Finance has also managed to add vessels to its fleet, with attractive charters, while growing the drilling rig business. I am not as concerned about Ship Finance's ability to maintain its dividend payments, and apparently neither is management, as they recently increased the payout. The solid run in the shares has taken the easy money off the table, but they still hold some appeal for investors with a desire for above-average income and exposure to what may finally prove to be the long-awaited recovery in vessel rates.

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A Rising Tide Of Sentiment Has Lifted Ship Finance

Seeking Alpha: Ship Finance Offers Good Returns For Above-Average Risks

Double-digit dividend yields often come with a substantial "but" attached. The junk in the trunk in the case of Ship Finance (SFL) comes in both the form of the significant ownership stake of shipping magnate John Fredriksen, as well as the company's heavily entwined dealings with other Fredriksen companies like Frontline (FRO) and Seadrill (SDRL).

While the shipping industry is still in rough shape, I don't think Ship Finance gets enough credit for the moves it has made to diversify into operations like offshore drilling (admittedly, another boom-bust industry) and offset the risk of customer defaults. A default from Frontline would certainly be noisy and negative, but not nearly as harmful to underlying cash flow and dividend support. With these shares trading below what appears to be fair value on an EBITDA and NAV basis, and paying a 10%-plus yield as of this writing, I believe Ship Finance is an attractively-priced, albeit risky, way to play shipping and collect a large dividend.

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Ship Finance Offers Good Returns For Above-Average Risks

Investopedia: Transocean Still Has Plenty To Prove, But The Valuation Isn't Demanding

It doesn't seem like it was that long ago when Transocean (NYSE:RIG) was considered one of the best-run energy-related companies and the leader in the offshore drilling industry. While Transocean still has far and away the largest offshore fleet, the company's issues with downtime, operational efficiency, and legacy Macondo liabilities has eroded a lot of the goodwill the company had built with the Street. Transocean's valuation doesn't appear very demanding today, and an improving deepwater market should help, but management still has to rebuild its credibility if the stock is to get the sort of valuation it used to enjoy.

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Investopedia: Seadrill Still In Motion, But Delivering Better Utilization And Dividends

Although I've had some issues with Seadrill's (Nasdaq:SDRL) aggressive (and highly levered) business plan, one thing really hasn't changed about this company – if you believe that various oil and gas majors are serious and committed to growing their production over the next five years, Seadrill is going to be a significant beneficiary. I sometimes wonder if Seadrill management is playing out some sort of deep-seated desire to be investment bankers with all of the elaborate deals and transactions they conduct, but the reality is that they are doing well in terms of contract coverage and dividend payments, and that counts for a lot.

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Investopedia: Can Atwood Keep The Positive News Flowing In 2013?

For all of the talk of "catalysts," it's easy to think that Wall Street has a short attention span, and that may not be far from the truth. At a minimum, the Street is quick to incorporate new information into stock prices, and stocks can languish in the absence of a constant stream of positive news. That leaves Atwood Oceanics (NYSE:ATW) in a potential predicament for 2013. While Atwood has done an impressive job of realigning its fleet towards higher-value assets, the lack of new contract opportunities could leave the stock trading on reported margins, industry pricing trends and prospects for a MLP conversion.

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Investopedia: A Favorable Settlement Should Open The Door For Transocean To Outperform

It has been a rough few years for deepwater drilling specialist Transocean (NYSE:RIG). In addition to a recent cyclical downturn in offshore drilling, the company seemed to fall behind a bit with its fleet and started losing business because of unexpected downtime issues. Worst of all, however, was the terrible BP (NYSE:BP) Deepwater Horizon/Macondo rig accident and the substantial financial liabilities that the company incurred for its role in the accident.

Now, however, things seem to be turning around. The company has taken steps to improve its fleet and rates are back on the way up. Most importantly, at least in the near term, Transocean has reached a very favorable settlement with the Department of Justice for its Macondo liabilities, suggesting that the company is close to having this matter behind it.

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Investopedia: Improving Utilization And Efficiency Should Shrink Transocean's Discount

It's been a long and painful fall for Transocean (NYSE:RIG). Once seen as one of the best operators in the energy space, and deserving of a premium valuation as a result, Transocean has struggled with its involvement in high-profile accidents, unacceptable downtime leading to contract cancellations and various other operational shortcomings. While I wouldn't say that Transocean is completely in the clear again, nor back in Wall Street's good graces, the combination of improving operations and discounted valuation could make this stock an outperformer in 2013.

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Investopedia: Does A Shake Up At Seadrill Really Change Anything?

Ordinarily, a sudden change in management during a highly valued growth/momentum story would be expected to shake up the stock. But then Seadrill (NYSE:SDRL) has never been an ordinary story and it looks like the markets aren't too troubled by news of a new CEO and a possible corporate relocation. While I'd be inclined to agree that Wednesday's news really doesn't change a lot for the company, valuation is still pretty robust on this name.

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Investopedia: Seadrill Has What Big Oil Badly Needs

For investors who want to go full throttle into offshore energy exploration, Seadrill (NYSE:SDRL) is hard to beat. This company has quite a lot of debt and sizable spending commitments to shipyards (for new rigs), as well as a fairly complicated corporate structure. But Seadrill also has one of the best, newest fleets on the water and commitments from major oil and gas companies that should lock in favorable profits for years to come.

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Investopedia: Improving Offshore Activity Bodes Well For Tidewater

The offshore energy market is tough enough in normal times, or whatever passes for normal. Making matters even more challenging for Tidewater (NYSE:TDW) have been the uncertain fate of the company's Sonatide JV, the need to refresh the fleet, and the fractured state of the market in which many small players will cut prices to gain business. While the service and supply side of offshore energy will probably always lag drilling, in terms of investor interest, Tidewater could nevertheless be worth further investigation as offshore activity picks up.

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Investopedia: Will Seadrill's Aggressiveness Pay Off?

There are a lot of energy industry veterans who believe that only the conservative survive, and it's not hard to see where they're coming from - companies that have levered up and expanded aggressively during booms have often been the ones to go bankrupt during the inevitable busts. Seadrill (NYSE:SDRL) is hoping to blaze a new trail, though, and the company's large new fleet should reap the best of what this upsurge in offshore drilling activity has to offer.

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Seeking Alpha:Can Transocean Send Its Problems To The Bottom Of The Sea?

Once considered the best offshore drilling company, if not one of the best energy-related companies overall, Transocean (RIG) has had quite the run of trouble over the last two years. Not only is Transocean still involved in the Macondo disaster mess with BP, but the company has had some very un-Transocean-like operating issues including significant unscheduled downtime.

Recent results suggest that these problems are largely behind the company. What's more, dayrates seem to be getting pretty healthy again. Though Transocean shares are already well off their late 2011/early 2012 bottom, growing EBITDA and improving investor sentiment could lift these shares higher still.

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Can Transocean Send Its Problems To The Bottom Of The Sea?

Investopedia: Ship Finance Has The Hatches Battened Down

Shipping is still a mess. Tanker rates have picked up a little bit and dry bulk rates seem to have at least leveled off, but overall rates are still not very good. That presents a fairly uninspiring backdrop for Ship Finance (NYSE:SFL), one of the world's largest tanker fleet owners. Although Ship Finance seems built to last, investors may wonder if the risk of further worsening conditions and/or a dividend cut is worth the potential of a sector recovery and the above-average dividend yield.


Restructured Deal with Frontline was a Must
Ship Finance does not operate the ships it owns, instead it charters them out to operators on long-term contracts. Unfortunately, a very large percentage of the firm's ships (and nearly all of its oil tankers) are chartered to Frontline (NYSE:FRO), the recently-struggling shipping firm controlled by John Fredriksen. For related reading, see Play the Bottom in Shipping.


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Investopedia: Seadrill - The Driller For Mad Dogs And Englishmen

Investors in stocks like Transocean (NYSE:RIG) or Diamond Offshore (NYSE:DO) might not be feeling the love yet, but the offshore drilling market is actually starting to get better. With a very modern fleet, aggressive leverage and a healthy dollop of devil-may-care operating philosophy, Seadrill (NYSE:SDRL) is ready for that turn. The question for investors, though, is whether they can handle the risk and valuation that comes with arguably the most aggressive player in a highly cyclical sector.

A Ho-Hum Third Quarter  
The markets are still expecting the offshore drilling market to be more of a 2012 event, so Seadrill's third quarter earnings are not likely to be examined quite so closely. Revenue was okay, falling 4% from last year and rising 3% from the second quarter. Rates were not all that incredible this quarter, but utilization was quite good and the company is bringing more of its rigs under contract.

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Investopedia: Transocean Has Value, But Badly Needs Growth

Feel free to start performing, Transocean (NYSE: RIG); we're all waiting on you. While Transocean often finds itself in lists of top energy service ideas, the company's five straight missed quarters are making it harder and harder to stay optimistic on this leading offshore driller. Although the long-term fundamentals for offshore exploration are indeed strong and Transocean shares look like a value stock, investors will have to be patient here, as management must not only rebuild performance, but rebuild Wall Street's trust as well. (To know more about value investments, read: 5 Must-Have Metrics For Value Investor.)

A Miserable Third Quarter 

If there was good news in Transocean's third quarter report, it was pretty much limited to the absence of any kraken attacks on the company's equipment. Revenue fell 4% from the second quarter, and 3% from last year, on lower utilization rates caused by downtime issues. Although rates are not terrible, the company had the worst performance in its highest-margin segments.

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Investopedia: Transocean Puts Billions To Work

Lately, one of the concerns around offshore drilling specialist Transocean (NYSE:RIG) was what it was going to do with its balance sheet. Institutional investors don't generally appreciate under-exploited opportunities and there seemed to be a general sense that Transocean management needed to get a little more active. With Monday's announcement, those concerns seem to have abated for the time being.


The Deal  
Transocean announced that it had reached a deal to acquire Norway's Aker Drilling for $1.43 billion in cash. Transocean valued Aker at NOK 26.50, a 62% premium to the prior close. Aker also has debt on its balance sheet, so the actual deal value is more in the neighborhood of $2.23 billion (net debt of $0.80 billion).

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Investopedia: Transocean's Lull Creates Buying Opportunity

Offshore drilling company Transocean (NYSE:RIG) shows the power of the "whisper" number. Although the company reported disappointing results on Thursday, the stock actually traded up - a move that does not seem to make much sense until you look at the prior month's trading and see that the stock has been going almost straight down. 


Even allowing that other drillers like Noble (NYSE:NE) and Pride (NYSE:PDE) haven't done well either, Transocean stands out. Likewise, Rowan (NYSE:RDC), Atwood (NYSE: ATW), and SeaDrill (Nasdaq:SDRL) have all been weak on a generally poor near-term outlook for offshore operators. Also keep in mind that Transocean's earnings estimate dropped by about one-third over the past three months - investors were bracing for bad news, they got it, and they are apparently relieved it was not even worse than they assumed.


Q1 Results - No Work, No Money
Transocean owns an impressive fleet of rigs (about 20% of the worldwide offshore fleet), but they are little more than depreciating hunks of metal when there are not enough orders to keep them busy. For the first quarter, revenue was basically flat with the fourth quarter. Dayrates were actually a fair bit better, up about 5%, and rates were even better for ultra-deepwater and harsh-environment rigs. (For more, see A Primer On Offshore.)


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CAM-Do

Like a junior high school dance, a lot of players in the energy space are hanging back and waiting for others to start the action. Nobody seems to doubt that there is going to be another wave of energy development projects and rig-building, but there seems to be some reluctance on the part of the major players to make a move. This could be good news for investors thinking about taking a position in Cameron (NYSE:CAM). 

The Quarter that Was
Cameron got a lot of the wrong kind of publicity during the BP (NYSE:BP) oil spill debacle (the company provided the blowout preventer), but the drilling moratorium did not significantly hurt the company's third-quarter business. Revenue rose 24% from the year-ago level, and net income increased by 19%. EBITDA was a little less impressive, climbing 19% on a year-over-year basis.

Although the company surpassed estimates by a small margin, there was more positive news in the order book. Orders were up 10%, and the book-to-bill for the quarter was just a bit under 1.0. The company's backlog is also quite considerable, standing at nearly $5 billion exiting the quarter. Although this represents an increase in backlog on a sequential basis, year-over-year figures were reduced.


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