RD's Picks

On Monday the 17th, GSF released its monthly Summary of Current Offshore Rig Economics (SCORE) report and the news raises a warning flag. If you're not familiar with it, the SCORE report is essentially an index of dayrates and profitability for offshore drill rigs. This month it was down 0.5%.

This report comes at the same time we're seeing record oil prices and a Fed rate cut that brings inflation and weak dollar fears to the market. These trends all support the trend of higher rig dayrates continuing. However, a big part of the bullish case for GSF and other offshore drillers is their ability to roll over rig contracts to higher day rates and the latest SCORE report may, emphasis on may, indicate that trend is abating. Add to that, concerns have been raised about rising operating costs at some of the recent conference calls for the drillers.

If GSF just continued at current earnings levels, it would be at a PE of 11.4, still well below the market. Bump that PE to a still conservative 14 and you get a stock price of 89 compared to today's close of 72.75 - looks like a no-brainer, back up the truck buy. Of course, that assumes no increase (or decrease) in earnings and current estimates are for strong earnings growth. Makes it look even cheaper.

However, I'm nervous here. The stock continues to look cheap, BUT if the drillers are starting to lose pricing leverage and their costs are going up, the stellar earnings growth could be coming to an end. I haven't sold any more either in the SLO or my IRA account, but will be watching carefully for any news and the next SCORE report. This SCORE report could just be a blip, even one or two more could be a blip. But nothing goes up forever.

To summarize, I still like the offshore drillers - particularly with a rate cut that should help stave off a recession and record oil prices that make sky high rig rates practical - but if there are more indications that they're having trouble rolling contracts over to higher and higher rates, it'll be time to sell, bank the profits and let someone else make the last few points.

To make it more complicated, GSF and Transocean (RIG) have agreed to a merger. If you like RIG and think the merger will go through, GSF has consistently been the cheaper way to buy the new company.

Assuming no additional news, I'll add to my SLO portfolio if GSF dips into the 60's; I'll start taking more off the table above 75. If it hits 85, I'll be out for SLO and for real. There's typically enough volatility with GSF to make it a good candidate for trading around a position.

Comments will be appreciated since you might help me make or save real money with this one.

Comments: View Comments |  Tuesday September 18, 2007