Deepwater Drillers Move Forward Despite Oil's Dip

Low oil prices have taken their toll on everyone from small oil explorers to service suppliers, but it appears the deepwater drilling industry is performing remarkably well in the downturn.

The industry is still building ships as fast as it can, and long-term contracts continue to be signed at attractive prices. Seadrill (NYSE: SDRL  ) has led the charge recently, and with the company's strong dividend and focus on deepwater, this looks to be one of the best stocks in the industry.

Expanding into deeper water
One of the positive trends overall for oil drillers is that their ultra-deepwater drill rigs have been under contract before completion in recent years. This is in contrast to shallow-water rigs, which are being stacked regularly, doing nothing for shareholder returns.

Seadrill signed a five-year contract for $919 million with an additional two-year option on an ultra-deepwater rig that won't be completed until December. The company also signed a $204 million one-year contract for a new semi-submersible ultra deepwater rig that is under construction.

To expand its deepwater capabilities, Transocean (NYSE: RIG  ) recently completed an acquisition of Aker Drilling, which has two semi-submersible rigs capable of reaching 3,000 meters and two 3,650-meter maximum-depth drill ships under construction.

Old company, new name
Ultra-deepwater competitor DryShips (Nasdaq: DRYS  ) has been hanging on simply because of its ultra-deepwater drill ships for a while now, but finally the company has been spun off. Ocean Rig (Nasdaq: ORIG  ) is now trading on its own, leaving DryShips to sink or swim with the drybulk business.

Before getting too excited about Ocean Rig as an investment, just keep in mind that George Economou is still the CEO and chairman, and his history of performance for shareholders isn't good.

Leaving the shallows
While most major operators are turning to deeper-water rigs to fill their fleets, shallow-water rigs are being left behind. Hercules Offshore (Nasdaq: HERO  ) seems to be the only company betting on shallow water, while most big operators are getting a growing share of revenue from deepwater rigs. Considering the length and size of the contracts being signed in deepwater, it's the only place I would trust my money in the offshore-drilling industry.

Interested in reading more about offshore drillers? Add your favorites to My Watchlist, and My Watchlist will find all of our Foolish analysis on these stocks.

Fool contributor Travis Hoium has no 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. Motley Fool newsletter services have recommended buying shares of Hercules Offshore. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (6) | Recommend This Article (5)

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.

  • Report this Comment On October 13, 2011, at 11:22 PM, ryanjmorrell wrote:

    Dryships still owns a majority stake in Oceanrig, where do you think that Dryships will be left to sink or swim with the drydulk segment if it still receives synergies from spinning off its small stake in the very profitable Oceanrig where rates are now in the mid 500k, as shown by there recent contract off the west coast of Africa.

  • Report this Comment On October 14, 2011, at 11:12 AM, markike wrote:

    You should get your facts straight before publishing an article just to get your hours in... Dryships owns a 76% stake in Ocean Rig, so they will continue to swim with the deepwater drillers. The better ORIG does, the better DRYS does. When rates return in 2 years, DRYS will be setup. As for shallow water, there will be a huge surge in early 2012 as the GOM opens up and Hercules and Diamond along with NOV are going to capitalize on these economic activities.

  • Report this Comment On October 14, 2011, at 12:40 PM, bunngolf wrote:

    "You should get your facts straight before publishing an article just to get your hours in." LOL. Agreed.

    A little more rigorous research would be appreciated by Motley Fool.

  • Report this Comment On October 14, 2011, at 3:31 PM, ryanjmorrell wrote:

    I totally agree with you and also believe your right about the whole hours thing. He doesnt even understand how dryships is set up with Oceanrig but will publish an article explaining how it functions as a company.

  • Report this Comment On October 15, 2011, at 10:50 AM, bgpr wrote:

    Stay away from anything George Economu touches.

  • Report this Comment On October 26, 2011, at 6:09 AM, DrLawUsa wrote:

    I feel soooo sorry about the ingorant people above! Go ahead and invest to any of G.E. companies please... your kids will blame you for life, because you will destroy not only your lives, but their future too.

    Read the IPO's before you buy stock... Dryships declare it in its documents that preferential will be given to Cardiff (G.E & family company owns it 100%)... there are a number of company he owns... Drytank, Cardiff Marine, Dryships, TMS Bulkers - TMS Tankers (created after fine of some $2.5mil for oil pollution in the USA and probation), K2 (Norway), Classic Maritime (Monaco), a foundation in Liechtenstein and I bet a few more we are not aware of)! You will see selling ships from one co to the other making a loss... a loss to the public co/investors that is... private owned companies make same amount of profit ;-)

    1,000% agree with bgpr!!!

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