Grab Fat Dividends With Seadrill or Ensco

Source: Seadrill.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some oil-services companies to your portfolio but don't have the time or expertise to hand-pick a few, the Market Vectors Oil Services ETF (NYSEMKT: OIH  ) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in many oil-services companies simultaneously.

Why this ETF, and why oil services?
Companies that do a lot of exploration can be intriguing for those looking to invest in the energy industry. But they don't always strike oil. Consider instead the companies that provide equipment and services for those explorers. They tend to be less well known than the ExxonMobils and Chevrons of the world, but many have been better long-term investments. With shale oil, fracking, and offshore drilling growing more important to the industry, demand for services is likely to continue rising over the long run.

ETFs often sport lower expense ratios than their mutual fund cousins, and this asset-laden fund charges just 0.35% annually. It's a newish ETF that slightly lagged the world market in 2013 but has trounced it this year.

A look at some components
Seadrill (NYSE: SDRL  )  and Ensco  (NYSE: ESV  )  are among the roughly 25 oil-services companies in this ETF.

Seadrill will have many investors drooling at its 10% dividend yield. It's a compelling investment opportunity in some ways, but there's reason to worry, too. The lessor of offshore drilling rigs faces falling prices due to a growing supply of rigs on the market, but a relatively young fleet gives Seadrill an edge. For example, it recently inked a $1.1 billion, five-year deal charging $600,000 per day for a new rig. Seadrill is poised to do well over the long term thanks to the boom in deepwater drilling, which is expected by some to contribute 15% of our daily oil supply by 2030. For instance, more than 600 million barrels of recoverable oil have recently been discovered off the coast of Canada.

Seadrill carries a lot of debt, but it has solid operating cash flow and has been using low-cost debt to invest in new rigs and other means of future growth. It is responding to the growing supply of rigs on the market by suspending future building plans for now, not including the 19 rigs it has under construction. The company's last quarter was surprisingly good, topping estimates and also including a small dividend increase. With a forward P/E ratio near 11, Seadrill stock is appealing, and its dividend is a thick layer of icing on the cake. Still, a lot depends on how well its dayrates hold up and how much of its capacity is used -- and it does have a lot of debt to repay.

Ensco, another operator of offshore drilling equipment, offers a plump 5.4% dividend yield. Its payout has tripled over the past five years, and still has room to grow. Some see the company, along with Seadrill, as the "best of breed" in its industry, liking its relatively low debt, young fleet, and generally high profit margins. On the other hand, its fleet use rate is lower than Seadrill's and not stellar in the industry, either.

Like Seadrill, Ensco is challenged by a rising supply of rigs in the market, which is pressuring dayrates. But also like Seadrill, Ensco recently secured a big five-year contract with French oil titan Total at higher-than-expected prices (starting around $610,000 per day). My colleague Rupert Hargreaves has pointed out that the fat contract could still be renegotiated or canceled, as others have been recently.

Ensco's stock sports a current and forward P/E ratio of about nine, well below its five-year average of 11.5, suggesting that the company is attractively priced. It's well worth considering for your long-term portfolio, offering the potential for both stock-price appreciation and generous dividend income. Just remember that the industry's next few years could be bumpy.

The big picture
It makes sense to consider adding some oil-services companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.

Here's another way to profit from oil
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3019936, ~/Articles/ArticleHandler.aspx, 8/29/2015 5:12:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated 19 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
ESV $17.83 Up +0.80 +4.70%
Ensco CAPS Rating: ****
OIH $30.74 Up +0.93 +3.12%
Oil Service HOLDRs… CAPS Rating: ***
SDRL $7.90 Up +0.52 +7.05%
Seadrill CAPS Rating: ****