A Sea Change In Transocean's Favor

By Gene G. Marcial

A Killing From Drilling?
After treading water much of the year, Transocean (RIG ) is finally catching up with its peers. Since mid-August, the stock has risen from 23 to 36. Still, shares of the world's largest offshore driller -- mainly deepwater and harsh-environment drilling -- are up a mere 6% since 1999, while the broad oil-service index OSX has doubled. Why? Until recently, "most major oil companies were forecasting oil prices would settle at around $20 a barrel," says Stephen Leeb, president of Leeb Capital Management, which owns shares. At that price, the more expensive deep-sea drilling is marginally profitable at best, he notes. With oil now about $55 a barrel, Transocean, which controls some 40% of deepwater oil drilling rigs, is starting to get orders, says Leeb. Low demand had discouraged rig builders from investing in new ones, and now "there will be a scramble for the few offshore rigs available," says Leeb. He says day rates are rising, which should mean "fat profits for Transocean." His 24-month stock price target: 60 to 65. He estimates earnings of $2 a share for 2005 -- way up from the Street's consensus of $1.07 -- and $4 in 2006, vs. the Street's $2. Roderick McKenzie of Sterne, Agee & Leach upgraded his rating from hold to buy.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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