Unless otherwise noted all quotes from the earnings call are from the transcript posted at SeekingAlpha.com, a great free source.

Transocean (RIG) reported 4th quarter 2007 earnings on Feb 20th. This was the first earnings report since they completed a merger with former competitor Global SantaFe. For those not familiar with RIG, they are the largest offshore drilling company in the world. They own and operate drill rigs and drill ships that work under contract to oil companies. This is a very capital-intensive business, during the conference call questions, RIG executives estimated a new rig ordered today would be nearly three-quarters of a billion dollars. Contract rates for the ultra-deepwater drill ships run upwards of a half-million dollars a day.

In the opening segment of the call, CEO Robert Long stated that integration efforts with the Global SantaFe merger are going well and "We also seem to be on track to achieve our goal of systems conversions by mid-year and are slightly ahead of our original targets on synergy savings."

One of RIG's strengths is a solid order backlog and that's continuing. They're started to get contracts and extensions on existing rigs for 2010 and out. Mr. Long gave some specific contract extensions they've landed and stated, "...interest in existing rigs with availability in 2010 has developed a bit faster than I expected and I think will accelerate as we get a little further into the year and we start to see some more of this capacity committed." Sr. VP of Marketing & Planning David Mullen stated this was, "... a very busy period in contract activity since the last earnings call with a number of contract commitments on the existing fleet with start dates in 2010."

New build interest is also good, Mr. Mullen stated, "We continue to see a lot of customer interest in new build opportunities and I expect in the coming quarters that a number of these will translate in to commitments." RIG policy is to avoid building rigs on speculation and expand the fleet only when there is contracted work available for new units. Oil companies are turning more and more to deep water, like the big discovery offshore in Brazil, to replace their reserves. That's very good news for Transocean.

The RIG - GSF merger included a cash payout to shareholders that was financed with a $15 billion bridge loan. Between convertible issues, bank loans and cash from operations "by the third quarter the bridge will be totally paid off," according to Greg Cauthen, the CFO.

The stock looks cheap-to-reasonable on fundamentals. Yahoo Finance shows a forward PE of 10.2, PEG of 0.64. Those numbers haven't been updated to the latest quarter yet. RIG doesn't pay a dividend. The solid, multi-year backlog makes the earnings fairly reliable and there's a huge barrier to entry for new competition. The order books at yards building drill rigs are full for several years and skilled crews to run the rigs are pretty much fully employed.

The stock popped by about seven dollars on the earnings report then pulled back a bit to close the week at just under 138. That's still off it's 52-week high of 149 and change from late December. The stock price is fairly volatile so there's a good chance of picking it up a little lower. Yahoo shows a consensus 12-month target of 155. I think that's low. If RIG hits earnings estimates and maintains its multiple, this stock could be trading near 200 by year end (2008 forecast earnings of 13.5, current ttm multiple of 15).

About the only bear argument I can come up with is that there aren't many bears on RIG. Yahoo's analyst opinion page shows 16 strong buys, 9 buys, 9 holds, 2 under performs and no sells. Over at the Motley Fool's CAPS system, 2400 players believe RIG will outperform the S&P 500 vs. 48 that think it will underperform. With that much bullish consensus, new buyer's for the stock may be tough to find.

Comments welcome - particularly if you have a bearish argument on RIG.

Disclosure - I have a small position in RIG.

Comments: View Comments |  Saturday February 23, 2008  |  Stocks: RIG,

Our question of the week asks if Citigroup (C) is a screaming buy. The stock certainly seems to be trading at a substantial discount to the market with a forward PE of 7 and price-to-book value of a little over 1. But, we need to look and see if that discount is warranted before placing any buy orders.

C and most other financial firms have had huge write-offs for bad mortgage loans over the past six months or so. In Citi's case, there's also a new CEO on board and we don't know what changes Mr. Pandit might make going forward or what new gremlins might be hiding on the balance sheet. Even though there have been substantial write-offs, there's no guarantee that the mortgage market has bottomed or that other consumer credit or commercial loans won't fall into the same swamp of defaults and uncertainty.

We also need to compare Citi to its competition to see how the valuation stacks up.

C does trade at a discount to the competition, but not a substantial discount. In this market, I'm very skeptical of forward earnings estimates and book values for financial firms. In Citi's case, I believe the uncertainties associated with a new CEO and what's on the books from the previous management warrant the discount to the competition. Citi cheap? - maybe. A screaming buy? - no.

Even though they trade at a premium, JP Morgan or Wells Fargo look like better investments to me. WFC and JPM haven't had as much bad news as some of the other banks and seem to have done a better job of managing credit risk. JPM looks cheap on book value and Wells' ROA and ROE look downright stellar in comparison to the others. All of these banks offer dividend yields above 5-year treasuries - a good deal for income investors IF they don't have to cut the payout. Bank of America, Wachovia and Citi's dividend yields are at a level that indicates the market is pricing in a significant risk of a dividend cut.

Citi offers more potential reward than other banks IF the worst is behind them. At current prices, that reward seems matched with higher risk. And, I suspect there will be some more stumbles along the way to recovery.

For any of these names, I wouldn't be backing up the truck. It might still be early, but nibbling on dips to establish a position makes sense. I think the credit markets will stay foggy and continue to offer occasional buying opportunities for some time.

In short, a trip to the Citi is a little more risk than I care to deal with.

Disclosure: I hold WFC both in SLO and real life. That hasn't been a lot of fun lately, but gradually buying on dips recently was profitable and the dividend payments help ease the pain.

Comments: View Comments |  Saturday February 16, 2008  |  Stocks: c, jpm, wfc,

While driving to church this morning, I caught part of The Wise Investor Show. The host was talking about dividend paying stocks and covered one of his company's recent recommendations, National Grid, plc (NGG). His summary was interesting enough to warrant a little more digging.

NGG is an international electricity and gas company with operations in Great Britain and the north east US. They're in the pipeline and transmission line business, so they make their money by carrying and delivering gas and electricity.

The company issued a management statement, similar to a quarterly report summary, on 31 Jan 08. They will be raising the dividend by 15% this year and are targeting dividend hikes of 8% each year through 2012.

Yahoo's financial statistics page shows a forward dividend yield of 3.2%. They got that by doubling the next scheduled dividend yield. The actual yield for this year will probably be higher since the final dividend payment is typically more than the interim. Like many European companies, NGG pays dividends semi-annually. The payout ratio is listed as 38%, which leaves a good cushion for growth, debt service and operations. The forward PE is shown as 13.2. The company has a market cap of a little over $40 billion, $4.3 billion of cash on hand and $37 billion in debt.

To summarize, dividend yield higher than a 5-year treasury, plenty of cash flow to cover the payout, plans to increase the dividend going forward, and a diversified revenue base. NGG fits the profile for companies I think should hold up well in a rough market. I'm not a technical analyst, but the chart shows two recent bounces off $75. I don't have this in my sloport or real holdings, but it looks attractive at the current price of just under $76 a share.

As I continue to increase my sloport exposure to solid dividend payers, I'll be looking to make some room for NGG.

Comments: View Comments |  Sunday February 10, 2008  |  Stocks: NGG,