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Rig Downtime Challenges Persist for Transocean

The 2012 outlook for the offshore drilling firm appears very difficult.

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Although  Transocean's (RIG) rig downtime issues and a difficult third quarter caused us to reduce our fair value estimate, we continue to view the stock as undervalued.

We still believe the long-term earnings power of its fleet is in the range of $6-$10 per share annually, a far cry from the estimated $1.51 a share that the firm will earn in 2011. However, this more normalized level of earnings is now further away than it was in early 2011. Furthermore, we believe Transocean's numerous short-term issues--which include managing its rig downtime, management's credibility after several poor quarterly performances, the all-cash payout for the Akers rigs amid Transocean's deteriorating financial condition, and the sustainability of the dividend--obscure the more attractive long-term picture. In our view, these issues will continue to weigh on the stock throughout 2012.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.