Drillers Move Into Deeper Water

Deep water is proving to be a lucrative place for drilling companies. Ships with the capability to drill farther and farther offshore are being built as quickly as shipyards can make them, and they're being put to work immediately. DryShips (Nasdaq: DRYS  ) is one company that made a big bet on deep water that is paying off. The company now has four ultra-deepwater ships in operation and another four under construction.

This month, Dryships signed a contract with Petroleo Brasileiro (NYSE: PBR  ) for the two ships that will be completed in 2011, for 1,095 days of work and a combined value of $1.1 billion. One of the company's older rigs, Leiv Eiriksson, also extended its contract with Borders & Southern. That leaves Eirik Raude as the only drill rig that doesn't have a contract through at least the middle of next year.

Seadrill (NYSE: SDRL  ) is also expanding its ultra-deepwater capabilities. It has the second-largest fleet of ultra-deepwater rigs behind only drilling giant Transocean (NYSE: RIG  ) . Seadrill has 12 units already in operation, with contracts for two and options for two more.

As oil becomes more difficult to find in shallow water, the market for ultra-deepwater drilling units has exploded. According to Seadrill, 21 units were ordered between October of last year and February, when the company reported earnings. But those rigs won't be completed for a few years, leaving existing operators to reap the rewards now.

With an expanding presence in deep water, Seadrill in particular looks like a good bet for investors. Shares are trading at just 10 times forward earnings estimates and the company pays a 5.5% dividend. Dryships looks even cheaper at just four times next year's estimates, but the company hasn't been known as a great steward of shareholder capital, is still primarily a dry bulk shipper, and doesn't pay a dividend.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Transocean and Petroleo Brasileiro. Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 24, 2011, at 9:43 AM, artmuseum wrote:

    RIG is "a mortally wounded giant" -

    disasters in triplicate smote the foolish

    shareholders who kept hanging around

    1. The Gulf spill 2. UNEXPECTED huge op loss, even bigger write down late 2010 - 3.- just reported - 50% drop in earnings.

    Even the billion $ gamble by a foolish hedge fund genius could not stop a 14+ point drop in RIG stock in a breathtakingly short time.

    SDRL - you foolish ones read it here first - sooner or later John Frediksen will become #1 driller. My foolish bet is on SDRL.

  • Report this Comment On May 24, 2011, at 4:39 PM, geoflying wrote:

    DRYS is a pumNdump losser,, couple weeks ago at $5.70 per share after the fabulus peport on the back log of drill leases custmers they have, the stock dropped since today at $360, junk stock.

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