Bonus Pick

[mrmarket]

has been emailed out!

[mrmarket]

just hit my target

[Karel]

You are HUGE

I owned it already, and I am waiting for my own target (another 15%)

Regards,

Karel

[New-born baby]

HUGE congrats to a great stock picker. That ought to count as another winner, MM. Karel, please change the number.

[New-born baby]

You are HUGE

I owned it already, and I am waiting for my own target (another 15%)

Regards,

Karel

I think you are right on here, Karel. Let's see, another 15% is $184 . . . perhaps that is a little low, too. I'd say $220 is possible.

[mrmarket]

HUGE congrats to a great stock picker. That ought to count as another winner, MM. Karel, please change the number.

Thanks..but it was an unofficial pick.

[jiesen]

Congrats on the extra-HUGE pick, $$MM!

[mrmarket]

Here it is (was)..did everyone get the email?:

I sold RIG today at 160.19. That's a 15% gain, over my purchase price of 138.80, in only 2 months. Over the same period, the S&P 500 was up only 6%.

I am HUGE! And thanks so much to those of you who supported the Little Tigers and received this pick.

Bring me your finest meats and cheeses.

$$$MR. MARKET$$$


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Sent: Wednesday, March 5, 2008 3:46:00 PM
Subject: RIG ==> The Little Tigers Winner


Thanks so much for your generous contribution to the Little Tigers. Here’s some information on a stock I just bought today that I hope you might find useful.

As you may know, I work in the oil industry, so my employment, stock options and general economic will being are aligned with the oil industry. For this reason, I don’t discuss oil companies in public on my forum nor do I usually invest in any oil related stocks in order to limit my overall exposure to the industry and to keep myself divesified.

Having said all that, now and then I come across a company whose future is so bright and whose valuation is so reasonable, it’s just too good to pass up.
Today I bought stock in Transocean (RIG) at 138.80. I will sell it in 4 to 6 weeks at 159.99. Here’s why I like RIG:

First of all, as you can see by the chart, there are a lot of people besides me who like RIG. The stock is up over 80% for the year and its PE is still less than 10. If you look at its forward PE, the stock is so cheap it’s comical:

http://chart.finance.yahoo.com/c/1y/r/rig

Transocean, Inc. operates as an offshore drilling contractor and a provider of drilling management services worldwide. It contracts drilling rigs, related equipment, and work crews primarily on dayrate basis to drill oil and gas wells with a focus on deepwater and harsh environment drilling services. As of December 6, 2007, the company owned or operated a contract drilling fleet of 39 high-specification floaters, 29 other floaters, 68 Jackups, and 4 other assets utilized in the support of offshore drilling activities. In addition, Transocean had eight high-specification units under construction.

Unless you are from Mars, you are aware of the fact that crude oil is now over $100/barrel. At these prices, oil producers are desperate to get their crude oil out of the ground and onto the market. The only way for them to do so is to rent drilling rigs. Since everyone wants a rig, the prices for rigs are being bid through the roof. This means that, given the same cost structure, firms that offer these services are going to make more money…a lot more money. There is one simple fact about oil and prices. Engineers are smart. They are going to find and bring up the cheapest oil first. The harder to get oil has to wait in line. As the cheap oil gets used, engineers turn to the costlier oil. Get the picture? Oil is getting more expensive to find and produce, therefore oil prices will continue to go up, not down, in the long run.
In the offshore drilling business, bigger is often better. Fortunately for Transocean, they made some moves ahead of the curve that has set themselves up very nicely in this price environemnt.

The world's two largest offshore drillers, GlobalSantaFe (GSF) and Transocean (RIG), merged last year which enabled RIG to be positioned to better offer the full scope of drilling services to customers in all geographical areas.

The deal essentially created a new capital structure for the two companies, with a lot more debt but at the way cash flows are coming in, this debt will evaporate soon.

Rig operators like the new Transocean can borrow so much because they have a huge stream of cash coming in. The new company has a combined revenue backlog of $33 billion.

Thanks to high oil prices, offshore oil drilling is definitely not in a downturn now. Companies are building hundreds of new offshore rigs to satisfy the energy demand.

The capability to find and recover petroleum at extreme depths, temperatures, and pressures, may indeed tip the balance of supply and demand in the long term. There will be a new frenzy of drilling at these depths in the Gulf of Mexico , where about a dozen promising exploration wells have already been drilled.

Other parts of the world that once appeared beyond the pale may also come into play. Areas believed to have oil deposits extremely deep beneath the ocean floor, which could now become commercially recoverable, include the North Sea off the coast of Britain , the Nile River Delta off the coast of Egypt , and possibly coastal Brazil , says Andrew Latham, a vice-president at energy consultancy Wood Mackenzie in Edinburgh , Scotland . Other analysts say West Africa could harbor lots of ultra-deep deposits. The areas have produced oil before but never from these depths.

Pioneering isn't cheap. Steel and skilled labor rates are going through the roof, as are rental rates for state-of-the-art offshore rigs. That's because these fancy rigs, which house 200 people and rise 415 feet into the air, are in short supply with drilling picking up. Still, energy experts believe that producing oil from ultra-deep wells can be very profitable as long as oil stays over $50 bucks, let alone $100. RIG is the leader in an industry with good concentration and steep barriers to entry. Deep-water drilling requires both huge capital expenditures and very specialized expertise; the coupling of these two necessities gives RIG a sustainable source of competitive advantage in this industry. It also has contracts already in place to guarantee steady cash flow for at least the next several years. While Transocean will fluctuate with oil prices, count on this company to offer more value than most in the rigging industry.

According to industry researcher ODS-Petrodata, effective rig utilization (the percentage of actively marketed rigs which are currently earning a day rate) was recently at 98.0% in West Africa, 100% in the Middle East, and 100% in the North Sea . Day rates have skyrocketed, partly because of a scarcity of available rigs for hire. Transocean is the industry's largest contract driller and is expected to benefit from strong demand for its deepwater rigs.

The next five years will tell the story. I'm leaving out the demand side of the U.S. equation. If you believe our next president and the Congress will draft a cohesive energy policy that curbs demand and successfully encourages new energy sources, you don't want to play in this game. Just be mindful that we have over 100 million cars on the road, gas guzzlers, and they're going to hold the road over the next 10 years.

Oil now accounts for 95% of transportation energy, and future growth in oil demand is inexhaustible. Do you know that an article ran in The Economist in March 1999 that projected $5 a barrel oil, that the Saudis would flood the world with cheap oil and demand would peak. Wow! Actually, oil demand the past 10 years grew 1.5 million barrels per day, and, like I said earlier, the cost to find new oil keeps rising.

The ANAL- yst consensus for oil hangs in the mid-$80 range. If oil stays above $100, earnings estimates are 15% too low for 2008. This could be one of just a few upside surprises for a major sector of the market this year. Long-term forecasts range much lower--$70 to $85 a barrel. Commodity traders taking the long side on far out futures contracts took home fortunes the past few years. Let's randomly look at some of the key reasons why prices must almost certainly rise in the long run:

Nigeria is the largest producer in Africa, and the fifth-largest supplier of crude to the U.S. , and the situation there is a mess. Tribal violence has led to cuts in production by the likes of Royal Dutch Shell and Chevron that have chopped the country's output by more than 500,000 barrels a day ... perhaps lots more.

There has been chatter about OPEC trimming production to prevent prices from sliding. Those notions are all very nice, but most OPEC nations, especially Iran and Venezuela , need to produce all-out to maximize their cash flows. And only Saudi Arabia has any real ability to expand upon its output.

Concerns continue to proliferate about declining production in a variety of locations -- the latest being Russia -- at precisely the time that global demand is expected to grow by as much as 40% by 2030. In that connection, it's noteworthy that Exxon, Shell, ConocoPhillips, and Chevron all saw their liquids production drop amid rapidly rising crude prices in the December quarter.

The demand side for oil is compelling when you look at incremental increases for China , India and other emerging economies. Demand could grow by 1.5 million barrels a day for the next 10 years. Considering the decline rate in existing oil fields, the world needs some 37 million barrels of new capacity to keep pace. This is a big number. To the extent it's unfulfilled, oil prices will rise until they trigger demand destruction. So far, demand destruction remains a vague, iffy concept.

Oil could rally an additional 10% to 15% in the coming months. Currently, oil investors are starting to bid up the long-dated contracts, which suggests that oil could stay at the $100 dollar level for some time.
RIG isn’t even taking any chances -- for ordering new deepwater vessels on speculation, that is. Transocean continues to conservatively seek a minimum payback on newbuilds.

Transocean recently signed two big "forward start" deepwater contracts -- i.e., ones not beginning until current rigs roll off their current contracts in 2010 -- with Anadarko Petroleum and the firm's mid-water rigs are seeing strong interest from the likes of Nexen and Eni.

Factor in some deepwater newbuild contracts that Transocean expects to sign in the upcoming quarter, and you've got a recipe for big gains ahead. Rates for rigs are now up over 100% of what they were in the last couple of years. Transocean owns two ultra-deepwater rigs with availability in 2009 and 2010. The demand for these rigs is expected to exceed supply through 2011, pushing dayrates above the $550,000 level

High dayrates are great and all, but last quarter's rates, or even today's rates, don't tell you a lot about tomorrow. Rates go up, until they don't. That's why it's critical to keep an eye on contract backlog. Let's look at the growth in backlog over the past few quarters:

Q4 2006 $20.8 billion
Q1 2007 $21 billion
Q2 2007 $21.4 billion
Q3 2007 $22.9 billion


Do you see what I see? Backlog isn't just growing -- it's accelerating. The end of the second quarter saw backlog up $400 million.

Here’s what the boss recently had to say:

“Looking at the market we continue to enjoy excellent fundamentals. The deepwater market in particular remains substantially supply constrained. We spent some time in India during our recent travels and it’s clear from both the government and customers that there’s an urgent requirement for more deepwater rigs in India . In Brazil , all of you are aware of the recent announced discoveries in [Tupi and Jupiter] and the tremendous prospective demand that could be generated.”

“Together with the backlog of development projects and continued exploration success in West Africa, growing demand in Asia and the huge potential of the Gulf of Mexico , particularly on the Mexican side, we think the deepwater market will remain supply constrained for a long time.”

“As we look forward to 2008 we expect to experience a significant increase in contract drilling revenue from the inclusion of the full year of Global Sante Fe operations in 2008 versus only one month of Global Sante Fe operations in 2007. We also expect dayrate revenue increases from the commencement of higher dayrate contracts to be meaningful.”
So what about earnings?

Transocean Inc.reported net income for the three months ended December 31, 2007 of $1,056 million, or $4.17 per diluted share, on record quarterly revenues of $2,077 million. The results compare to net income of $621 million, or $2.92 per diluted share, on revenues of $1,186 million, for the three months ended December 31, 2006.

Robert L. Long, Chief Executive Officer of Transocean Inc., stated, “This past year was historic for Transocean. It was a record year in terms of financial, operational and safety performance, and we entered 2008 with a record-high revenue backlog. By merging with GlobalSantaFe, we transformed the company and now have a larger global footprint and more extensive technical capabilities.”

If RIG can do $4.17 per share for the next 4 quarters, and maintain its PE of 10, that would drive the stock price to $160 (which is my target). However if you do the math, at the rates they are getting now for their rigs, they should easily make $19.10/share in year 2008, which would take the share price to $191. Remember, the revenue they get from raising the rig prices goes directly to the bottom line…there is no incremental cost to operate.

Anyway, I hope you enjoyed reading this write up. I really appreciate your generosity to the Little Tigers. Seeing my boys play football is like a dream come true, and you’ve been part of it. Thanks again.

$$$MR. MARKET$$$

PS I copied some of the long time $$$MR. MARKET$$$ members on this email as well, just as a thanks for sticking with me all these years.
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I am HUGE! Bring me your finest meats and cheeses.

- $$$MR. MARKET$$$

[New-born baby]

You're huge alright. No argument on that point. Congrats!!!

But I gotta say this: RIG hit your target and pulled back in a hurry. If one was asleep at the switch, they are going to have to wait awhile to get out at $160. Frankly I think RIG takes out $200 . . . but I could be wrong.