Transocean Insider Loads Up
A major buy from a key director
We will be taking a break from our weekly newsletter highlighting the top insider transactions of the week. That article will be going out tomorrow morning instead of today.
This morning I wanted to quickly highlight that one of my top positions had a large insider buy. The key insider purchased 30,000 shares in the open market for $7.40 per share.
The company is trading well below replacement value and the industry is rapidly improving. As day rates continue to go higher the company should generate meaningful operating leverage, which should allow them to rapidly de-lever their balance sheet.
I see a lot of upside.
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Transocean Insider Loads Up
Monday afternoon, March 6th, a Form 4 filing from Chad Deaton, a director at Transocean (RIG) showed purchased a total of 30,000 shares of Transocean $7.40 per share. The transaction had a total monetary value of $222,000.
This is a major investment and further solidifies the thesis that Transocean, and frankly the entire offshore space, is undervalued with the industry rapidly improving.
Following the transaction, Mr. Deaton owns 141,000 shares, representing a total investment in dollar terms of just north of $1 million.
Mr. Deaton isn’t any run of the block useless director such as a professor or academic with no business experience. By contrast, Mr. Deaton has a vast amount of experience in the energy industry.
Chad Deaton began his career with energy giant Schlumberger and eventually climbed his way to the role of Executive Vice President in the Oilfield Services Division. From there Mr. Deaton operated the largest natural gas rental compression fleet in the world as President and CEO of Hanover Compression. Today, Mr. Deaton serves as a director of Transocean and also Marathon Oil Corporation.
Insiders sell stock for any reason. Especially during this time of the year as many insiders planning for their 2022 tax liability. But when an insider buys a stock in the open market, it’s time to take a real close look. Because insiders buy for only one reason — they think the stock is going up.
It is extremely likely that Mr. Deaton is seeing first hand how the entire offshore energy industry is rapidly improving. Day rates continue to move higher, with many industry experts explicitly stating there is nothing under $500,000 per day in the ultra deep water space.
But not only are the forward economics rapidly improving, the entire offshore space is trading for pennies on the dollar in terms of replacement cost. It’s extremely rare to find desirable assets experiencing significant demand trading for pennies on the dollar. We are at the inflection point where the industry is about to generate significant piles of cash but trades under the replacement value of those said assets.
The Transocean thesis is compelling. If day rates keep going higher Transocean will begin locking in long-term contracts with forward looking EBITDA vastly higher than the trailing EBITDA of the past decade.
In the past decade the entire offshore space has been in a recession. Every major player went bankrupt besides Transocean. Rigs were sent to the boneyard and scrapped for their metal value. A significant supply of rigs were removed from the market given the decade long period of demand destruction. And now demand is back, and we are almost out of ultra deep water drillships.
If demand continues to improve, day rates could spike back to pre-2014 levels. In this period the entire industry was trading well above book value. They were paying double digit dividend yields. Asset managers and CNBC talking heads touted them as compounders. They were Wall Street darlings and major ETFs and dividend funds owned them.
If demand for offshore drilling continues, levered offshore drillers like Transocean will grow into their debt levels. That 4.5x debt-to-EBITDA ratio quickly becomes 1.0x. Debt is then retired and cash accumulates to equity holders. Assets trading for pennies on the dollar are valued over replacement cost. The industry acts rational and stays disciplined on capital allocation. The entire space is a multi-bagger.
Nobody is building new ultra deep water rigs. It costs in excessive of one billion and would take multiple years to complete. This lack of new builds has lead to an extremely tight market. Industry experts are saying it is impossible to get day rates for ultra deep water drillships below $500k/day. To make things even more exciting, Petrobras is mopping up the market of all the excess supply. They could seriously influence other majors to secure rigs before it is too late.
This is my favorite industry to be in right now. Prior to the decade long recession, offshore drillers traded meaningfully higher than book value, paid double digit dividend yields and locked in multi-year contracts at day rates that are in excess of today’s rates.
I think rates continue to move up and values here get closer to replacement cost. Should the industry begin locking in multi-year contracts north of $650k per day, the entire space will re-rate much higher.
Disclosure: I own Transocean (RIG) and will buy or sell my shares anytime following this article. This is not investment advice. I am not an investment advisor. Do your own research.
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