Why are Hedge Funds Betting on this Oil Stock?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Transocean’s (NYSE: RIG) stock is currently trading at ~$44.98 and is down by over 48% since the Deepwater Horizon oil spill in April 2010. Although now the company is showing some signs of recovery, as its shares are up ~15% year to date. In a recent US Court ruling for the Federal Circuit, the rig contractor has won a dispute with the Copenhagen, Denmark based company Maersk. The litigation is a five year old patent infringement case for Transocean’s dual-activity technology.

On the other hand, in a recent settlement with the U.S. Justice Department, BP (NYSE: BP) has been found guilty for what happened at the Deepwater Horizon oil spill, and the company has been charged with a penalty of $4.50 billion. Despite this, BP is on the path towards full recovery, and has a targeted divestiture program of $38 billion that is nearing completion. Proceeds from the divestiture will be invested into the upstream and downstream remodeling strategy. BP is also committed to creating shareholder value, with an annual EPS of $4.98 and a forward P/E of 4.54.

Underwater oil drilling has always been a strong growth area with the discovery of new sites for explorations and increasing demand in the market. That's why Transocean has been favored by many hedge fund managers. Transocean is among the holdings of the hedge fund Omega Advisors, owned by Leon Cooperman, former Chairman and CEO of Goldman Sachs Asset Management. He increased his holdings in Transocean 19%, thus bringing his total investment in the company to $136,607, with Transocean’s stake in the fund to 2.74% of the fund’s total portfolio.

Apart from an investment in Transocean, one more company that was picked by Omega is Walgreen (NYSE: WAG). Omega Advisors bought a new stake in Walgreen worth $68,660; 1.37% of the total portfolio. Walgreen has strong growth prospects given its low cost benefit and global presence. The recent announcement of Medicare Part D plan to become a preferred pharmacy chain and the acquisition of Alliance Boots will drive incremental benefits for the firm. This acquisition will help Walgreen transform itself into a major lifestyle chain.

Other than Omega Advisors, there are a few more hedge funds that are investing in Transocean. Transocean is the third biggest holding in the portfolio of King Street Capital, managed by Brian Higgins. It must be pointed out here that King Street is known for investing in distressed companies.

Besides Transocean being a favorite for the hedge funds, I'd also like to point out some of the deals and sales that the company has made recently that will add to its already strong fundamentals.

New Contracts

The Discoverer Americas (ultra deepwater floater) – Transocean received a two year contract from Statoil ASA, a Norwegian oil giant, in the U.S. Gulf of Mexico. The contract starts in May 2014 at a daily rate of $600,000, up from $509,000.

The GSF Grand Banks (midwater floater) – Transocean received a 32 month contract from Husky Energy, a Canadian Oil giant, at a daily rate of $410,000, up from $297,000, to work in Canada.

The GSF Monarch (high-specification jackup) – Transocean received a 18 month contract to work in the North Sea at a daily rate of $162,000, up from $95,000.

Transocean Winner - Marathon exercised a six-well option to operate in the Norway part of the North Sea at $461,000 a day.

New Deals

Royal Dutch ShellWinning a 10 year contract worth $7.6 billion is the largest deal in Transocean’s history. Under the deal, it will provide four newly built ultra-deepwater drillships. The four rigs will be built starting in the final quarter of 2013, with first delivery from its shipyard scheduled in mid-2015.

Divestiture

As part of its divestiture strategy Transocean is reducing its exposure to the lower specification, less differentiated assets. It is finalizing the sale of 38 standard jack-ups and one barge rig to Shelf Drilling, in addition to another nine standard jack-ups. The Competition Commission of India has given approval for the $1.05 billion deal.

In conclusion, the total backlog for the company now stands for $1.1 billion in new contracts and extensions, which highlights the strength in the drilling market. With its divestiture strategy, the company is now focusing more on high-specification jack up rigs and planning for a debt free balance sheet. Additionally, with an impressive forward P/E of 9.58, it is on the verge of recovering and has the potential to fulfill revenue expectations. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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