The offshore rig rental business has a positive five year picture; even if oil prices come down, $80 to $100 oil will still justify spending on this expensive form of oil drilling. With only a few companies w/ the offshore rigs to rent and the expertise to run them (NE, RIG, DO, ESV), the picture for this subset of oil services is very positive. However, please note that over the next couple of years, the Gulf of Mexico and the North sea may be less profitable areas when compared to Latin America and the Middle East.
The two best companies are NE (best run) and RIG (largest). RIG reports earnings this coming week (I believe on Wednesday, May 7th) and the results will probably be very positive and RIG is likely to move up. I expect that Noble (NE) will tag along, and I believe that NE has even more upside potential.
Transocean (RIG) at $152 is priced for around 6.7% earnings growth each year for the next five years.
Although the merger with GSF may impact 2008's earnings, I expect that on a three year and five year basis, earnings will grow at a double digit pace each year.
RIG reports earnings on Wednesday and RIG's progress on cost containment will likely take center stage.
Assuming 2008 FY EPS of $11.5 and 10% EPS growth each year for the next five years and zero growth thereafter (new rigs will be coming online in a few years), RIG has an intrinsic value of $173.
Noble (NE), although smaller then RIG, as far better margins, and would have to incur negative earnings growth to justify it's current stock price of $58.
Noble's three and five year earnings forecast is excellent. To establish a price range, take the earning's assumption built into RIG applying that to NE we have 2008 EPS of $6 and 7% EPS growth each year for four years, then the intrinsic value is $76.
If we priced NE at 7: Assuming 7% growth (same as RIG) for 4 yrs and 2008 earnings of 6 a share, then stock should be $76, currently $58. However, if we assume a more likely 10% EPS growth from 2008 to 2008 to 2012 then NE has an intrinsic value of $84.
Therefore, NE is a strong buy.
$58.55 (05/04/08)
