Here’s the latest addition to our investment portfolio:
We discussed RIG in detail on a couple occasions in the past 2 months. First, I laid out some of the reasons for the severe underperformance of RIG stock over the past five years (flat in a very strong market) in a Deep Dive post on Dec. 6th. We expanded on the RIG thesis in a Name that Trade post on Jan. 3rd, discussing the idea of a long RIG / short oil pair trade.
Well, RIG caught our attention today as it has neared its 1 year low (which is at $44.19) after being downgraded this morning by two separate analysts. With the thought that this could be a potential buying opportunity, we went back to review our prior posts. This was my takeaway from that Deep Dive post last month:
Even as earnings have totally disappointed over the last 5 years, investors have been willing to pay for the underlying asset value of Transocean as a company. That has really been the floor in terms of valuation from an investor perspective. The fact that the P/B ratio is still near 1 implies quite limited downside for the stock. If the company can improve its earnings power, then expect strong stock appreciation. But even if operations don’t immediately improve, an investor in RIG is likely risking only 20-30% (based on book value) for a potential 50-100% return over the next couple years.
RIG is an interesting value investment here based on fundamental metrics and Icahn’s involvement. The key risk to me is a potential decline in oil prices to levels where offshore projects become unprofitable. Barring that, the risk/reward for a stock like RIG is skewed to the upside, after the woes it has experienced since that 2010 disaster. We’ll keep our eye on this one on the long side – piggybacking off of Carl Icahn has been a rather profitable affair for good reason.
With today’s decline, RIG is now trading at book value, so the skewed upside vs. downside scenario seems even more relevant today than it was last month. Moreover, crude oil prices have actually held up ok even with the start of tapering in December. Finally, Carl Icahn is likely going to continue to push management to unlock shareholder value, whether in the form of asset sales or the return of cash. Considering the already cheap fundamental valuation, other deep pocketed value investors could be circling as well.
We’ll take the opportunity to add a simple long stock position to our investment portfolio today.
TRADE: Bought RIG for $45.15
Earnings are in late February. We might provide an update to the position before then if we decide to do any protection or leverage structures in the options ahead of earnings.