Drilling for Oil

I have to give Jim Cramer credit for one of my biggest winners to date. Transocean (RIG), which also now owns Global SantaFe after a merger (one of my other winners before the deal went through), has had a great run the last few years. However, I think it actually looks more attractive now than it ever did before. I've been buying more of it the past few days as it gets killed by big sellers. I don't see much of a drawback with this company. The largest deep sea driller on the planet and there are not enough offshore rigs to go around. With rigs in high demand and short supply, it doesn't take an economist to figure out the equation. It's kind of like the shipping industry, in a way, but instead of relying on the Baltic Dry Index, Transocean and other drillers rise and fall with the price of oil. This makes no sense since drillers have long term contracts and the daily fluctuation of oil futures should make little difference.

Last weekend, IBD dedicated an entire page to the drilling industry (page A10 of the June 2 issue of IBD) and it confirmed what I'd already read and heard from others like Jim Cramer, but with a little more in-depth analysis and explanation. Oil has had an extraordinary run (to the dismay of many) and the price of oil itself could fall from here. But I don't see how that will end the run of the drillers. Maybe the stock prices will stabilize (Transocean has seen significant institutional selling lately with high volume price drops), but where's it going to go? A forward P/E of 8 - 10 with exceptional revenue growth, ROE, earnings estimates. What's not to like? In the short term, it could face a pullback and continue to sell off with the plummeting price of oil, even though this is a senseless reaction due to the oil drillers' strong economic position. Jim Cramer has said that oil is getting harder to find and the deep sea drillers are finding that hard-to-reach oil. Maybe it's too well known, run up to high--the easy money has been made. Maybe Transocean will trade sideways for the next couple of years. No way to know for sure. But oil is still a finite resource, alternative energy sources haven't replaced it yet, and I definitely wouldn't want to be on the other side of this trade.