Offshore drilling company Transocean (NYSE:RIG) shows the power of the "whisper" number. Although the company reported disappointing results on Thursday, the stock actually traded up - a move that does not seem to make much sense until you look at the prior month's trading and see that the stock has been going almost straight down.

Even allowing that other drillers like Noble (NYSE:NE) and Pride (NYSE:PDE) haven't done well either, Transocean stands out. Likewise, Rowan (NYSE:RDC), Atwood (NYSE: ATW), and SeaDrill (Nasdaq:SDRL) have all been weak on a generally poor near-term outlook for offshore operators. Also keep in mind that Transocean's earnings estimate dropped by about one-third over the past three months - investors were bracing for bad news, they got it, and they are apparently relieved it was not even worse than they assumed.

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Q1 Results - No Work, No Money
Transocean owns an impressive fleet of rigs (about 20% of the worldwide offshore fleet), but they are little more than depreciating hunks of metal when there are not enough orders to keep them busy. For the first quarter, revenue was basically flat with the fourth quarter. Dayrates were actually a fair bit better, up about 5%, and rates were even better for ultra-deepwater and harsh-environment rigs. (For more, see A Primer On Offshore.)

Unfortunately, utilization dropped 3% overall, led by an 8% drop in midwater floaters and a 9% drop in harsh-environment floaters. For those unaccustomed to oil services terminology, utilization is basically a measure of what a rig could have earned if it were working each day as opposed to what it actually earned in revenue for the period.

Transocean mitigated some of the disappointment by keeping a good rein on expenses. Like revenue, operating expenses were basically flat on a sequential basis. As a result, adjusted operating income actually improved about 5%, even though the company did miss the consensus estimate by a wide margin once the benefits of an asset sale are removed.

When, Not If
Transocean saw out-of-service time jump about 48% to 37 rig-months in the first quarter. It is hard to see that continuing indefinitely, though. Sure, the Gulf of Mexico is still a mess
and drilling activity there is severely compromised. But looking around the world, companies like Anadarko (NYSE:APC), Statoil (NYSE:STO) and Apache (NYSE:APA) are all still moving forward with drilling plans off the coasts of Brazil, Norway and Africa.

Even though the story has been repeated so often it has become a cliché, the reality remains that less and less oil is being found on land relative to offshore. What's more, E&P companies are having to dig ever deeper and in harsher conditions to tap their reserves. So even allowing for the ongoing increase in rig construction (including rigs being built for the spot market), Transocean is looking at a market with good multi-year demand conditions. (For more, see Anadarko's Balance Paying Off.)

The Bottom Line
The annoying and difficult part of buying a stock like Transocean is that it forces an investor to go against normal instincts. By and large, it's not a good idea to buy companies with stagnant demand, high cap-ex demands, and historically undisciplined competitors. But that's the oil services sector - if investors want to play, they have to come in when things look bad and be ready to sell when things look great.

To that end, Transocean is a middling-to-good prospect today. The stock looks about 20 to 30% undervalued, and legal problems relating to BP's (NYSE:BP) oil spill will linger on for years. High oil prices have left relatively few bargains, but investors could still profit from the pessimism and short-term underperformance around Transocean today. (For more, see Value-Creating Stocks To Watch.)

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