The Best Offshore Drilling Stock

The offshore drilling business has had its ups and downs as it returns to a more normal state nearly two years after the Gulf of Mexico oil spill.

Some rig owners such as Transocean (NYSE: RIG  ) have struggled with new control equipment recertification requirements and higher standards for equipment. And the trend of offshore production moving further into deepwater has hurt operators such as Hercules Offshore (Nasdaq: HERO  ) , which have focused rigs on shallow water.

But the industry appears to be on an upswing as more ultra deepwater rigs are completed and drilling picks up off Angola and Brazil. With some of these stocks trading at relatively low multiples and paying high dividend yields, it might be the right time to pick up some drilling stocks.

Company

Stock Price

EPS (TTM)

EPS (2012 est.)

Dividend Yield

Transocean $39.28 $1.98 $3.12 8.0%
Seadrill (NYSE: SDRL  ) $34.33 $2.96 $3.20 8.8%
Hercules Offshore $4.35 ($0.38) ($0.40) N/A
Noble (NYSE: NE  ) $30.29 $1.20 $3.92 1.7%

Source: Yahoo! Finance.

As you can see, Hercules Offshore has struggled, and is expected to continue to struggle, with shallow water drilling. Meanwhile, deepwater-focused Transocean and Seadrill are highly profitable with a high dividend yield and are expected to grow as ultra-deepwater drilling grows.

Noble is quickly adding ultra-deepwater rigs to its fleet with eight new, dynamically positioned drill ships being added. Revenue grew 20% in the last quarter and earnings more than doubled to $0.53 per share as utilization and day rates rose, so the company may soon provide a better value than Transocean and Seadrill.

But my top pick is Seadrill, which has a lot of exposure to ultra-deepwater with 24 rigs in operation and another five under construction. The company only had 44 rigs in operation during the third quarter, so this is a more leveraged bet on ultra-deepwater drilling than other operators. The company's dividend yield of 8.8% and history-beating earnings estimates make this a value I can't overlook.

I have an outperform rating on Seadrill on My CAPS page. You can check out the rest of my picks here.

Interested in reading more about oil drillers? Add them to My Watchlist to find all of our Foolish analysis on each stock.

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Fool contributor Travis Hoium manages an account that owns shares of Seadrill. 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 Noble and 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 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.


Read/Post Comments (6) | Recommend This Article (13)

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 January 09, 2012, at 5:41 PM, InspectorJavert wrote:

    It's funny, you never mentioned the massive debt that Seadrill carries. I'm not saying it's a bad company, $10 billion. Any company out there (DO/RIG/ATW, etc) can borrow that much and build a fleet of brand new deep-water platforms. What's so special about SDRL? And to continue to pay out such a divi is irresponsible with such ann overhang.

  • Report this Comment On January 09, 2012, at 8:46 PM, TMFFlushDraw wrote:

    You're right, that is a risk factor that I didn't cover in this article. Other drillers also hold a large amount of debt too but SDRL is more leveraged because of new units.

    As for the dividend, it was increased this last quarter due to improving backlog and financing conditions. Again, a risk factor that's worth keeping an eye on but I'm OK with it right now.

    Travis Hoium

  • Report this Comment On January 10, 2012, at 1:55 AM, MichaelDSimms wrote:

    There are plenty of good energy companies to invest in. I think STO and RDS/A are good buys at today's prices. If oil goes higher which is a pretty good possibility then they get even better. Not sure why anyone would only look at only offshore companies considering the added costs and risks involved.

  • Report this Comment On January 10, 2012, at 9:22 PM, gbad00 wrote:

    Seadrill, as I understand it, is so far in debt because it has been investing in brand new, up-to-date equipment that complies with the recently more stringent deep water drilling regulations. It seems to me that news of Transocean's difficulties in getting new permits was largely responsible for its recent downturn. This difficulty was ascribed to its outdated (and aging) fleet, which needs a lot of repair and modification. At least, that news was what prompted me to sell at $51+.

  • Report this Comment On January 11, 2012, at 10:49 AM, UBMProject wrote:

    Actually, HEROs fleet is capable of drilling semi-deep water and the company is actually poised to benefit from the find of deeper water wells in the Gulf because of their dominating presence there. Their books are off because of the just recently (2 qtrs ago) completed transaction of rigs from Seahawk (I believe?). They are in the process of seeking two of those rigs so that should provide a beef up to their books this quarter should the transaction be included in the books. Yes they may carrry a big debt (as all other drilling companies do), but HEROs book value is actually the best percentage wide that I've seen in the industry (~$7.30). Plus oil has been trading around the $100 level for pretty much all of this past quarter and they sell by the barrel at ~$108. Day rates have also increased. Check the call and put option spreads, those will speak for themselves. Remember, if you can't fight greed, invest in it.

  • Report this Comment On January 17, 2012, at 12:49 PM, torrentino wrote:

    Any one have any ideas y this stock has been dropping. Even before the recent news about the rig being involved in the fire I have seen a big drop in HERO. My break even is at 4.29...any one want to share their thoughts. Thinking about selling calls for April but not sure if should wait for increase in stock price.

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