Drilling for Deep Value

 | Sep 21, 2012 | 3:00 PM EDT
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One of the fascinating parts of my jobs is perusing scores of articles and research pieces on a daily basis to find actionable trade ideas. There is nothing more rewarding than finding a nugget that enhances your portfolio's performance.

Yesterday, I came across a piece in a Minneapolis paper that highlighted how Caribou Coffee (CBOU) was served at J.C. Penney's (JCP) new store within a store demo for 300 analysts. The article also speculated that Caribou could be chosen to set up small coffee shops for all 700 J.C. Penney stores. This would more than double the company's retail footprint and obviously be a huge catalyst for the stock. I picked up some shares of Caribou, which stock moved up 6% yesterday.

Another article recently caught my eye that delved into the impacts on deepwater rig construction after BP's (BP) massive spill in the Gulf of Mexico in 2010. The environmental tragedy caused a significant delay in the construction and deployment of ultra-deepwater structures. (The new rigs being constructed are being built with latest safety features as the result of the Macondo disaster.) As a result, major oil companies are struggling to secure these rigs as deepwater deployment in is accelerating. These deployed rigs should number over 130 by the end of the year compared to just 84 in 2010. The piece goes on to state that "every new deepwater rig under construction for delivery in 2013 or 2014 is either spoken for, under contract or will be under contract soon."

Obviously, this development should have positive impacts for the dayrates and profitability of these deepwater rigs and should provide businesses in the space a significant tailwind for several years to come.

Rowan Companies (RDC) and Transocean (RIG) are two such businesses. Both companies already have substantial offshore drilling assets and are moving further into the ultra-deepwater space.

Rowan provides offshore oil and gas contract drilling services in the U.S. and internationally. The company has a fleet of over 30 self-elevating mobile offshore jackup rigs.

Four reasons Rowan is a good growth pick at $35 a share:

  1. The company is repositioning itself to be an ultra-deepwater provider. It has divested itself of some non-core assets and has four ultra-deepwater rigs on order. The first of these structures should come on line in late 2013 and is already contracted out at better than $600,000 a day for three years. The fourth rig should be available in early 2015.
  2. Rowan's earnings are on a sharp up ramp. The company earned just $1.07 a share in fiscal 2011 but is on track to make over $2 a share in 2012. Analysts have it making around $3.50 a share in 2013.
  3. The company is on track to boost revenue north of 45% this fiscal year and should book just under a 20% sales increase in 2013. The stock has a five-year projected PEG of less than 1 (0.79).
  4. The stock is selling at a cheap 10x forward earnings given its earnings growth. Credit Suisse has an Outperform rating and a $50 price target on Rowan, projecting the company to earn north of $5 a share in fiscal 2014 due to its new deepwater rigs.

Transocean provides offshore contract drilling services for oil and gas wells worldwide. It offers deepwater and harsh-environment drilling services and has ownership interests in almost 140 mobile offshore rigs.

Four reasons Transocean has significant upside from $46 a share:

  1. The company has orders in for an ultra-deepwater floater and several high-specification jackups. It has won several major new contracts recently, and its ban in Brazil due to a minor spill should be lifted shortly.
  2. The stock is cheap at just 7% over book value and 10x forward earnings.
  3. The median analyst price target from the 32 analysts that cover the stock is $60 a share, nearly 35% above its current price.
  4. The company has been significantly above earnings estimates for the last three quarters, and the stock sports a low five-year projected PEG (0.65) as well.



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