Transocean, Inc (RIG)

HFAC Stock Pitch

April 24th, 2008
About Transocean

 A Firm Summary
Services
 Offshore contract drilling services for oil
and gas wells.
 Deepwater and harsh environment drilling
services
 Oil and gas drilling/engineering
management services
 Oil and gas exploration
Fleet
 139 mobile offshore drilling units
 39 high-specification floaters
 29 midwater floaters
 10 high-specification jackups
 57 standard jackups
 8 ultra-deepwater floaters contracted for or
under construction
Clients
 Major energy companies
 Independent oil and energy companies
 Has a broad range of clients from the
big to small
By the Numbers
TRANSOCEAN INC

• Last Trade: 152.22

• Day's Range: 150.60 - 154.21
• 52wk Range: 80.50 - 153.08
• 1y Target Est: 158.04

• Volume: 4,497,272
• Market Cap: 48.37B
• EPS (ttm): 14.13
Porter’s Five Forces

 Summary: RIG
Porter’s Five Forces
 Barriers to Entry
 Large capital investments
 Especially for deep and ultra-deep drilling
 Permits to drill
 Top players have market caps in excess of
$20 billion
Porter’s Five Forces
 Buyer Power
 Not much for the average consumer
 Large and varying number of buyers acting
non-uniformly
 Oil does not have many substitutes
 Inelastic demand
Porter’s Five Forces
 Supplier Power
- With the help of the recent merging trend,
suppliers of the industry gained greater
supplier power.
- Suppliers are more concentrated into a few
supermajor firms, weakening the buyer poewr and
strengthening the supplier power.
Porter’s Five Forces
 Rivalry
- Oil production & exploration are dominated by
state-owned firms
- There has been a trend of reassembly among
large companies into supermajor oil firms
- The merging strategy results in decreased
competition among the major firms as a few
supercompanies dominate the market
Porter’s Five Forces
 Threat of Substitutes
- There few substitutes for the market.
- The supermajor firms have been dominating the
refining and marketing portion of the oil industry
from its start.
SWOT Analysis

 Summary: RIG
SWOT Analysis: Strengths
 Strengths
- World’s “largest” at many factors, giving
customer trust and name value
- Largest offshore driller with 140 mobile offshore
drilling units
- Largest jackup rig driller with 68 unites
- Largest deepwater driller with 34 rigs
SWOT Analysis: Weaknesses
 Weaknesses
- Its business depends on the level of activity in
the offshore oil and gas industry, which is very
volatile
- Its industry is highly competitive and cyclical
with intense price competition
- Its business involves numerous operating
hazards, which are also cost risky and can
affect its performance
SWOT Analysis: Opportunities
 Scarcity of resources
 Rising oil prices
 Long term contracts
 New production
SWOT Analysis: Threats
 Importance of oil prices
 Potentially rising labor costs
 Increasing competition
 Importance of weather
 Politics
Financial Statement Analysis:
Income
 Income Statements
 2007 Revenue: $6,377,000,000
 Cost of Revenue: $1,270,600
 2007 Margins: .595
 YoY Growth: 126%
Financial Statement Analysis:
Balance Sheet
 Assets and Liabilities
 Solvent
 Cash: $1,241,000,000
 Long Term Debt: $11,085,000,000
Financial Statement Analysis:
Cash Flow
 Operations
 Depreciation: 411,000,000
 Investing
 Capital Expenditures: 1,380,000,000
 Financing
 Net Borrowings: 13,456,000,000
Financial Statement Analysis:
Summary
 High Profit

 High Debt
 High levels of investment
 Aggressive expansion of production
capabilities
Principal Rivals
 Main competitors:
 Noble Corp.
 Pride International Inc.
 All three companies participate in oil and gas
exploration and production.
 Transocean’s geographic niche: operates in the
offshore regions of Texas and Louisiana as well as
the U.K. sector of the North Sea.
Principal Rivals (Cont.’d)
 Transocean is the largest of the three with a
market cap of 49.86B (vs. Noble’s 15.62B
and Pride’s 7.16B)
 At the same time though, RIG appears to be in a
position to grow at an even greater rate than its
competitors over the next few years (a 5 year
expected PEG ratio of 0.31 vs. Noble’s 0.38 and
PDE’s 0.7) .
 Neither competitor appears to be in a position
to threaten Transocean in the near future.
Apparent Weaknesses
 Rising global labor costs
 With that said, RIG seems to stand in a position to be hurt
less by rising labor costs than its competitors due to the
geographic locations of its drill sites.
 Production levels at shallower depths have slowed
recently
 However, higher oil prices make it more financially viable to
drill at lower depths.
 Earnings dependant on external price of oil.
 Valuation Metrics

Ratio RIG Industry Percentile

PE 11.4 19.9 49
PEG 0.3 1.2 7
Price/Sales 5.8 3.8 97
Price/Book 4.2 5.8 69
Price/Cash Flow 10.2 16.9 49
DCF Analysis
 Assumptions
 Revenue Growth: 50% - 15%
 Expense %: 65%
 Tax Rate: 10%
 Depreciation: 10%
 Capital Expenditures: 15%
 Discount Rate: 10%
DCF Analysis
 Key figures (2016)
 Number of shares outstanding: 318m
 Value per Share: 164.78

 Analyst Projections (2009)

 Value per Share: 158.04
Transocean
 Why Transocean?
 Perfect fit for a strong but changing industry
 Value buy
 High levels of borrowing due to well-timed
investment

 Timeline
 Minimum: One year