Is This A Penny Stock Millionaire Stock?

Most novice traders assume a penny stock is trading for, well, pennies on the dollar. But by definition, a penny stock is any stock trading at under $5 per share.

Our pick is not an Over-the-Counter Bulletin Board stock (OTCBB), which would be prone to higher average risk than a traditional big board name. Instead, it’s a stock trading on the New York Stock Exchange (NYSE) that is significantly undervalued. This is the type of penny stock savvy investors seek out.

So, What Is It?

It’s Transocean (RIG), a Swiss-based company currently trading on the NYSE.

Transocean’s mission is to become the number-one offshore oil and gas drilling company globally, focusing especially on challenging and deepwater environments. “Deepwater” is defined as 10,000 to 12,000 feet in depth.

Transocean partners with rig-builders around the world to develop drillships, merchant vessels equipped with a drilling derrick, allowing them to tap into underwater oil and gas deposits.

Drillships are specifically manufactured to be able to get to petroleum deposits in very deep water and/or in inhospitable climates. These unique vessels are also equipped with a helipad to receive supplies and transport personnel, as well as equipment to help position and/or moor the vessel.

Currently, RIG boasts a current fleet of 37 offshore drilling units, ranging from ultra-deepwater, harsh environment, deepwater and mid-water rigs. More than 80 percent of RIG’s ultra-deepwater units are less than ten years old. Another 10 are semi-submersible vessels suitable for cold, windy, high seas environments and feature propulsion systems.

Transocean (RIG) is currently building two more ultra-deepwater drillships.

Revenue Growth: $7.3 Billion of Backorders

RIG’s expectations of growth are founded not only on demand but also on a backlog of orders worth approximately $7.3 billion as of summer, 2021.

In August of this year, RIG was awarded a $252M contract from BOE Exploration & Production LLC (BOE) for its new build ultra-deepwater drillship, the Deepwater Atlas, including a mobilization fee of $30 million. Additionally, the contract provides for significant performance bonus opportunities based upon agreed Key Performance Indicators (KPIs).

The Atlas is scheduled to be delivered in December 2021. Besides the Atlas, there is the Deepwater Titan, expected to be delivered in May 2022. RIG has agreed with Chevron U.S.A., Inc. that the Titan should be operational in the first quarter of 2023, at a value of $830M. Given that offshore drilling companies have been suffering since 2013 and even more so during 2020, the above factors look promising for RIG.

Earnings Growth Impressive

In the first quarter of 2021, RIG’s earnings were up an impressive 23%. Analysts believe RIG is trading substantially below its fair market value, offering lots of room to grow.

Much like every other global business, RIG certainly felt the COVID-19 fiscal meltdown of 2020, but the fact that it has since posted an uptick in earnings is a net positive, not to mention the fact that the company managed to weather the storm without resorting to Chapter 11 bankruptcy restructuring like many of its competitors.

Over the past 18 months, RIG has traded at between $3.00 to $5.00 per share. The stock is a compelling investment opportunity for savvy investors who are not risk-averse.

Another good sign for the short-term: meteorologists have said another La Niña will be impacting U.S. weather this coming winter, bringing with it the likelihood of more polar vortexes, along with their frigid temperatures.

Every La Niña weather pattern creates wetter-than-average conditions across parts of the U.S., especially the Pacific Northwest, northern Rockies, Great Lakes, Ohio Valley and western Alaska.

Looking back at previous winters and the deep freezes that La Niña and polar vortexes bring, it’s a virtual given that demand for heating fuels, such as gas, will skyrocket. This leads us to believe that RIG’s stock price has nowhere to go but up.

RIG is also an innovative company; its two newest ultra-deepwater rigs, the Atlas and the Titan, use hybrid power, actually generating power that can be stored for later use rather than running solely on diesel fuel. The company also is committed to environmental sustainability as well as crew and rig safety, which reduces the possibility of leaks and other environmental impacts.

Insiders and Hedge Funds Are Big Holders Of RIG Stock

Company insiders usually don’t place large “buy” orders unless they are supremely confident about business fundamentals. Over the past six months, RIG’s insiders have purchased an astounding 12,910,000 shares valued at more than $54M.

As for hedge funds, institutional investors such as hedge funds don’t usually invest in so-called penny stocks, simply because they avoid investing in companies with poor fundamentals. With that said, hedge funds do acknowledge when a penny stock has the potential for high returns.

Institutional investors, including both hedge funds and mutual funds, currently account for 53.9% of RIG’s total shareholdings. 

Some very recognizable names—The Vanguard Group, BlackRock, Two Sigma, PRIMECAP—among others, are sizeable holders of RIG. This is something to take note of. Institutional investors are likely looking at RIG’s 79 percent undervaluation, meaning the upside of RIG is about $15/share. Additionally, RIG is considered a good value based on its Price-to-Earnings Ratio of 21.2x, compared to the U.S. Energy Services industry average of 32.9x.

RIG Has Brand Name Partners Worldwide

Arguably, RIG’s biggest partnerships are with the behemoth Chevron U.S.A., Norway’s Equinor, as well as Royal Dutch Shell. RIG also works closely with BOE Exploration & Production LLC, a subsidiary of BOE Offshore Energy, a Louisiana firm operating primarily in the deep waters in the Gulf of Mexico.

South Korea’s Daewoo Shipbuilding Marine & Engineering is a frequent partner in building deepwater ships for RIG. RIG also partners with Beacon Offshore Energy. RIG’s patented HaloGuard™ technology was created in cooperation with Houston Mechatronics Inc. and Salunda Limited.

HaloGuard™ is the offshore drilling industry’s first safety system integrating a wearable locating device with drill floor equipment and machine stoppage controls. 

Transocean (RIG) is also the parent company of Songa Offshore, a European offshore drilling contractor with offices in Cyprus, Norway, Sweden, Houston, Kuala Lumpur, Scotland and Singapore.

Other subsidiaries include Applied Drilling Technology, based in Houston; Global Marine Inc., also Houston-based; Sedco Forex International, based in Australia; Orion Holdings in the Cayman Islands; and numerous other joint ventures, subsidiaries and partnerships.

Market Size Continues To Grow

Transocean’s market is primarily major oil companies, government-owned or controlled oil entities and other independent oil companies.

In 2020, Transocean reported $3.3B in revenue, with it and its various subsidiaries operating in eight countries. The company holds 28 patents and has a history of drilling more than 5,000 wells.

As of December 2020, more than 5,500 people were employed by RIG. Some of the top offshore projects RIG has been involved with include Chevron’s Jack/St Malo’s Deepwater Oil Project in the Gulf of Mexico; the Catua Field off the coast of Brazil; and the Tyrihan’s oil and gas field in the Norwegian Sea.  According to Technavio’s Global Oil Drilling report, the drilling rig market is expected to grow $14.74B from 2021 to 2025, with a Compound Annual Growth Rate of 5.26 percent. That’s more good news for Transocean and its investors.

In terms of stock, on February 16, 2021, RIG reported 616,025,144 shares outstanding owned by 5,266 holders of record. The ownership breakdown is as follows:

Investor TypePercent Owned
Individual 7.49 percent
Institutional (hedge funds, mutual funds)53.39 percent

Transocean’s Risk Factors

It would be foolish to discount the impact that 2010’s Deepwater Horizon disaster had on Transocean’s business and reputation.

Built in South Korea, the Horizon was leased to British Petroleum (BP) and drilled at a depth of 35,050 feet in the Gulf of Mexico.

In April 2010, a methane blowout caused the Horizon to explode and killed 11 crew members. The resulting fire was inextinguishable, and the Horizon sank two days after the explosion. The subsequent oil spill is considered one of the worst environmental disasters in American history.

Later, the U.S. government placed the blame for the disaster on BP, levying significant monetary fines, as well as contractor Halliburton, for making cost-cutting decisions that negatively impacted the rig’s safety systems. Transocean was not spared from the finger-pointing, tarnishing its reputation.

Other risks, as detailed in the company’s most recent form 10K, filed with the Securities & Exchange Commission, are much like those cited by any other drilling company and are described as:

  • The possibility of the Organization of the Petroleum Exporting Countries (“OPEC”) to set oil and gas production levels, capacity and per-barrel pricing.
  • The level of production in non-OPEC countries.
  • Global inventory levels and the cost and availability of storage and transportation of oil, gas and related products.
  • Government policies, laws and regulations regarding oil and gas exploration and development, the environment and climate change.
  • International sanctions on oil-producing countries, or the lifting of sanctions.
  • Technological advances in exploration, development and production.
  • Additional technological development to exploit shale oil and gas reserves.
  • The discovery of new oil and gas reserves and the decline of existing reserves.
  • Laws and regulations related to the environment, including those addressing alternative energy sources and the risks of global climate change.
  • The development and market adaptation of alternative energy sources.
  • Accidents, adverse weather conditions, natural disasters and other similar incidents impacting the oil and gas industry.
  • Uncertainty or instability resulting from war, civil unrest, terrorism, public health threats or other crises.

Transocean’s Opportunities and Strengths

Transocean survived 2020 and with it, a historic crash in the price of crude oil. Several other drilling companies did not. As it continues to aggressively build back, RIG’s fortunes look positive, largely because of today’s fossil fuel deficit, RIG’s backlog and its general financial position. RIG touts the backlog as a significant strength, claiming it sets them apart from their competition.

This backlog includes amounts associated with a contracted new build unit currently under construction but excludes amounts related to the second new build, also under construction.

RIG reports its total fleet average daily operating revenue for 2020 was $327,500, up from $296,200 in 2018.

Yes, RIG has experienced some year-over-year loss, but that is largely due to the Horizon settlement combined with an adverse market environment, including the global pandemic. As of December 31, 2020, all the liability associated with the Deepwater Horizon disaster was paid off.

What remains extremely hopeful for the company and its subsidiaries is its recognized leadership in the ultra-deepwater field and its decades of business acumen. RIG’s management team is strong and stable, with Jeremy Thigpen, the CEO, having a tenure of nearly six years as well as significant leadership experience in the oil and gas sector.

Additionally, RIG continues to ink new deals, most recently, a three-well contract with Beacon Offshore in the Gulf of Mexico, valued at $252M.

In addition, Transocean is keenly aware of its environmental footprint. The company publicly announced its goal of cutting emissions by 40 percent by 2030. Currently, most of the company’s rigs run on diesel fuel.

Transocean’s Competition

The offshore drilling market has always experienced wild fluctuations and with a life cycle of approximately 30 years between the first tap to the end of production, some rigs will begin to age out. T

his will offer an up-side to RIG as well as its competition in the deepwater drilling niche. Remember: all these competitors, as well as RIG, face similar market-driven challenges. Top competitors include:

Valeris Plc. 2020 Revenue $1.42B

Valeris is undoubtedly Transocean’s fiercest competitor. Headquartered in Great Britain but operating from Houston, Valeris owns 61 rigs.

Noble Corporation. 2020 Revenue $964M

Noble Corporation is the successor entity for Noble Holding Corporation, which underwent Chapter 11 bankruptcy during 2020.

Diamond Offshore. 2020 Revenue $734M

Diamond filed for Chapter 11 bankruptcy in early 2020 after experiencing a 14.5 percent decrease in revenues.

Seadrill Ltd. 2020 Revenue $1.059M

Another victim of the 2020 economic downturn, Seadrill filed for Chapter 11 bankruptcy in early 2021, its second restructuring since 2017. It currently manages 34 rigs.

Schlumberger. 2020 Revenue $5.5B

Houston-based Schlumberger saw its revenues dip 15 percent year-over-year in 2020. Besides deepwater, it specializes in extended-reach and high-pressure/high-temperature wells.

Halliburton. 2020 Revenue $14.45B

Halliburton, with headquarters both in Houston and in Dubai, experienced a significant downturn in revenues in 2020, down from $22.41B in 2019.

Aban Offshore. 2020 Revenue $3.7B

Aban Offshore is an Indian company specializing in offshore drilling and pipeline construction. It experienced an astounding drop in revenues in 2019 but has bounced back quite well.

Borr Drilling. 2020 Revenue $60.2B

Borr Drilling is based in Bermuda as well as Great Britain. Borr experienced a revenue drop of 42 percent in 2020.

Is RIG A Penny Stock Millionaire Stock – The Bottom Line

Despite the push for a greener economy, fossil fuels are not going anywhere, especially in developing countries.

RIG is well-positioned for short-term growth, but not necessarily for the long-term, as the stock currently pays no dividends.

With hedge funds taking a bullish stance on the stock, as well as the strong activity by insiders, all signs point to a very positive outcome for investors with a stomach for risk and subsequent reward.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.