PROFILED: Transocean Ltd. (NYSE: RIG)
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The Arctic oil drilling market is shifting into overdrive, as the US government allows more drilling permits. Climate change is thawing out this once inaccessible region, creating a mad rush among major oil firms to tap the massive energy reserves that lie beneath the melting ice.
Transocean Ltd. (NYSE: RIG) should be a major beneficiary of the search for energy in the Arctic. Transocean is one of the largest offshore energy drilling equipment and service companies in the world. And the potential in this frozen region is vast.
"It's an ironic story how global climate change is melting ice in the Arctic, but the melting ice is allowing new exploration for more hydrocarbons, oil and natural gas,” says James DiGeorgia, editor and publisher of the Gold and Energy Advisor.
DiGeorgia says that 20 years ago, exploring in the Artic would have been impossible, but also economically and technically laughable. "Exploring in the Arctic confirms that the world has depleted the cheap, low hanging fruit of energy reserves. We are now exploring for energy in the Arctic, the shale and oil sands of Canada, and the deep off shores of the Gulf of Mexico, Brazil, Africa and the South China Sea. This says a lot about where we are in terms of global energy reserves. Investors need to have energy in their portfolios, a depleting valuable resource.”
According to the US Geographical Survey, the Arctic is estimated to hold about 22 percent of the world's oil reserves. The three largest areas that have the most energy potential are Russia, at 132.6 billion barrels of equivalent (boe); Alaska (72.8 billion boe); and Scandinavia (61.8 billion boe).
There is a big caveat: exploration and production in the Arctic will be expensive, dangerous, and environmentally, politically, and technically very difficult. Also, weather is a major risk. Exploration and production activity can only occur when weather permits, a few months out of the year.
What companies stand to gain the most from Arctic drilling? Most of the action will be with the mega global integrated energy companies such as Royal Dutch Shell (London: RDSA); ExxonMobil (NYSE: XOM); ConocoPhillips (NYSE: COP); Rosneft (OTC: OJSCY); BP (NYSE: BP); and Statoil (NYSE: STO).
But the energy equipment sector should really move when the Arctic drilling action intensifies.
Transocean was involved in the BP Gulf of Mexico oil spill disaster and has been fighting legal and financial responsibility. The stock has suffered because of its fight and the uncertainty over the outcome. But the legal wrangling is starting to dissipate over Deepwater Horizon, and Transocean is poised to take off—in the Arctic and across the globe.
Indeed, the brunt of the blame for the Gulf oil spill has fallen on BP. A Transocean engineer recently testified that BP didn't deploy a well-capping method created by Transocean, a critical omission in the Gulf disaster.
Now, Transocean can get back to its bread-and-butter business of building and leasing deepwater oil rigs, exactly the kind of rigs needed in the Arctic, and other severe environmental locales. All told, 27 of the firm's 82 rigs are of the ultra-deep water variety (7,500 feet or deeper) and 14 rigs for deepwater sites (4,500 to 7,000 feet.) There is big global demand for such rugs, and RIG has a bulging portfolio of back orders worth over $27 billion to prove it.
The stock was around $85 before the disaster and is currently around $45. The consensus Wall Street one-year price target for Transocean is $54, showing a potentially healthy upside. The share price is hovering over its one-year low, and earnings per share are expected to rise from an estimated $4.04 to $5.47 in 2014.
Transocean's dividend and yield, at 2.24 percent and 5 percent, respectively, also make this an undervalued stock. Second quarter 2013 revenue came in at $2.397 billion, compared with $2.197 billion in the first quarter. Operating and maintenance expenses for the second quarter were $1.393 billion, compared with $1.375 billion in the first quarter.
Second quarter earnings were $307 million, compared to $321 million in the first quarter. Earnings should pick up in future quarters, though, as the company puts the BP/Gulf disaster in its rear view mirror.
As major oil firms race for the Arctic, Transocean will be there to greet them.
Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.