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Proprietary Data Insights Financial Pros Top Oil Driller Searches in the Last Month
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Energy |
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A Non-Garbage Penny Stock
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When a stock trades below $5, it’s considered a “penny stock.” Most people don’t know this, but the margin rules change below that threshold. Traders who typically can borrow up to 4x the capital for a stock must put down a minimum of $2.50 per share. That limits anyone to 2x leverage on these stocks, which isn’t a bad thing. You see, stocks tend to trade below $5 because they’re garbage companies. But sometimes, one or two seem to have just forgotten to do a reverse split to raise their share prices. Transocean (RIG) is one of them. With Russian oil price caps in the news, financial pros’ searches for energy names have skyrocketed. And RIG was the one that caught our eye in our proprietary Trackstar database. This penny stock saw nearly 10x the search volume of its closest competitor among oil and gas drillers in the last month. We assumed there was something amiss here. But it turns out we were the ones who were “amissing” something… Transocean’s Business This Swiss-based company contracts to provide drilling rigs to explore and develop oil and gas. It’s the world’s largest offshore contract drilling service. Essentially, major oil producers use Transocean to put together drilling rigs, services, and manpower. It specializes in ultra-deepwater and harsh-environment drilling services. The company’s fleet is one of the most modern and versatile in the world. It consists of two groups: ultra-deepwater floaters (64% of Transocean’s revenues) and harsh-environment floaters (36% of revenues). Source: Transocean Transocean’s deepwater drillers can pull oil from 4,500 feet or more, while the harsh-environment floaters can hit as deep as 10,000 feet! The fleet currently consists of 37 mobile units with two ultra-deepwaters under construction. In 2018, the company acquired Songa Offshore for $3.4 billion, gaining five more harsh-environment floaters and two midwater floaters. Source: Transocean Later that year, Transocean acquired Ocean Rig UDW for $2.7 billion, giving it another nine ultra-deepwater floaters and two harsh-environment floaters. Financials Source: Stock Analysis When oil prices collapsed in 2014 due to the rise of U.S. fracking, Transocean’s revenues plunged from $9.185 billion in 2014 to $2.793 billion in 2017. Since then, they’ve steadily grown except in 2021, after COVID slammed the brakes on the world economy. Trailing 12-month revenues now sit at $2.59 billion with forecasts of $3.21 billion for 2023 and $3.61 billion for 2024. Gross margins compressed in the wake of the 2018 acquisitions and COVID. But more recent quarters have brought the trailing 12-month gross margin back toward 35%. Yet the company’s profit margin remains negative, with depreciation and amortization accounting for 28% of revenues. Interest expenses are also fairly high at 15.64% of revenues on a trailing 12-month basis, or $405 million. The good news is Transocean generates nearly $500 million in cash from operations while spending about $350 to $400 million in CapEx. That’s helped the company bring down its total debt load from $9.5 billion in 2018 to $7.2 billion. And with a current ratio of 1.64x, Transocean has enough liquidity to make any short-term moves it needs. Valuation Source: Seeking Alpha RIG doesn’t turn a profit, nor does peer Nabors Industries (NBR). Other competitors Valaris (VAL) and Noble (NE) carry respectable P/E ratios, while Helmerich & Payne (HP) is at a silly 1,064x. HP does have a respectable 12.54x forward P/E ratio. But low P/E ratios could indicate a lack of growth, which we’ll evaluate shortly. On a price-to-sales basis, RIG is the second-cheapest at 1.1x. NBR is the cheapest at 0.55x. All the others exceed 2.6x. The key ratio here is price to cash flow. Here, RIG holds a nice 6.65x with NBR at 3.63x. The others either don’t generate cash (VAL) or are fairly expensive for the category. Profitability Source: Seeking Alpha Ironically, RIG has the best gross profit margin among its peers despite the recent decline. That’s also true for its EBITDA margin. But the high depreciation and amortization expenses we noted earlier drag down its EBIT margin and, consequently, its return on equity. RIG generates the most cash from operations, with NBR in a close second. Growth Source: Seeking Alpha Interestingly, RIG’s growth is bottom of the barrel compared to its peers, on both trailing and forward bases. HP, which has a high P/E ratio, shows nice growth and forecasted revenues for 2023.
Our Opinion 10/10 This might seem out-there, but we like the risk/reward on this stock. It’s by no means the best on traditional valuation measures. But it’s got the best cash flow from operations, which we feel is more important and highly undervalued. To give you an idea, Transocean has 722 million outstanding shares. That means the company generates roughly $0.70 per share in cash. And that excludes its assets, worth $17.16 billion, or $23.77 per share. This is a speculative play, but with high oil demand and tight supply, we think it’s a good one. |
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