Barron's Believes that Oil Concerns Are Already Priced In to Transocean (RIG), Here's Why

Although shares of Transocean (NYSE: RIG) have taken a flogging over the past month-and-a-half, down 54% since the start of the oil leak into the Gulf of Mexico post-horrendous rig explosion, Barron's thinks that the shares will be able to overcome this challenge and rise like a slippery, coated Phoenix from the spill [or, ashes from the spill, to be more PC].

The shares are now trading for a price of $44.12, about the same as they were five years ago. As with all of the deepwater drillers, uncertainty is hitting shares of the company amid America's dismay over the procedures to cease the flow of oil gushing into the Gulf from BP (NYSE: BP).

The company has seen a few downgrades over the last few weeks, but many of the major ratings agencies have kept them at investment-grade, while S&P placed a Credit Watch with a negative outlook on the company.

As with many of the oil services global companies, Transocean gets about 75% of their revs outside the U.S., and Barron's notes that 30% of the oil consumed in the U.S. comes from deepwater drilling, making it unlikely that the ban will stick around forever.

RIG has $1.6 billion in cash and $3 billion in annual free cash flow, making it more than able to cover its proposed annual dividend that is scheduled to start in July, at a cost of $1 billion to the company.

The company has 139 rigs around the world that it leases out to big names like Exxon (NYSE: XOM), Chevron (NYSEL CVX), and BP Plc.

In terms of the Gulf of Mexico spill, Transocean may still bear a piece of the burden, to the tune of $500 million to $5 billion, by some analyst estimates. Concerns of contract cancellations, like the one by Anadarko (NYSE: APC), who cited force majeure, will cost the company money, along with legal investigations, which are currently underway. Four total contracts have been canceled, so far, due to the oil spill.

The company owns 14 of 33 total rigs that operated in the Gulf, and 85% of its revs come from deepwater drilling. However, the Gulf is not the only place where deepwater drilling takes place. Locations in Brazil and West Africa have up to 40 bids that rigs owners can currently bid on.

The shares are currently trading for just over 5x earnings, some of the cheapest valuation the stock has seen in recent times. Barron's believes that this is cheap, at about a 50% discount to the S&P 500, and they note that RIG has historically traded at a 10.7x forward P/E.

Barron's estimates that if drilling for the balance of 2010 is halted in deepwater locations, the company may earn as little as $5 per share. However, they believe that that, and other factors, may already be priced into the stock.

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